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MARKET STUDY FOR 
HOME HEALTH CARE SERVICES 



I ) 



Prepared for 

HEALTH CARE FINANCING ADMINISTRATION 
HCFA Contract No, 500-84-0033 

Federal Project Officer: \",' illiarr, Saunders 



Prepared by: 

Zachary Dyckman, Ph.D., Project Directo' 
Nancy Hurwit;, M.P.H. 
Christine Bishop. Ph.D. 
Marc Cohen, f/.P.P. 

CENTER FOR HEALTH POLICY STUDIES 
5865 Robert Oliver Place 
Columbia. Maryland 21045 

HEALTH POLICY CENTER 

HELLER SCHOOL 

BRANDEIS UNIVERSITY 

vValtham, Massachusetts 02254 

February '935 



.'< 



The statements contained in this report bv^ solely those cf the authors 
and do not necessarily reflect the views or policies of t'e Health Care 
Financing Adrii n i s t rat i on . The contractor assun>es respons ' b i 1 i ty for the 
accuracN and completeness of the information contained in this report. 



CENTER FOR HEALTH POLIC 



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TABLE OF CONTENTS 



EXECUTIVE SUM-l-.RY 

1. INTRODUCTION 

1.1 Purpose of the Study 

1.1.1 Study Objectives 

1.1.2 Limitations of the Study 

1.2 Background - A National Perspective . . . 

1.2.1 Home Health Care: The Product . . . 

1.2.2 Market Participants 

1.3 Overview of Market Study Methodology . . . 

1.3.1 Site Selection 

1.3.2 Information Sources 

1.3.3 Data Instruments 

1.4 Outline of Report 

2. SACRAMENTO AND STOCKTON, CALIFORNIA 

2.1 Economic, Demographic and Health Care 

Environment 

2.1.1 Regulatory Environment 

2.2 Definition of the Market: Geographical . . 

2.3 Definition of the Market: Cost and 
Utilization 

2.4 Market Concentration 

2.5 Nature of Competition Among Home Health 
Agencies 

2.6 Price Variation Among Home Health Agencies 

2.7 Home Health Agency Use Patterns 

2.8 Reactions to Medicare and Medicaid . . . . 

2.9 Reactions to Competitive Bidding 

2.10 Other Payment Mechanisms 

2.11 Sources of Information 

3. NEW ORLEANS, LOUISIANA 

3.1 Economic, Demographic and Health Care 

Environment 

3.1.1 Regulatory Environment 

3.2 Definition of the Market: Geographical . . 

3.3 Definition of the Market: Cost and 
Utilization 

3.4 Market Concentration 

3.5 Nature of Competition 

3.6 Price Variation Among Home Health Agencies 

3.7 Home Health Agency Use Patterns 

3.8 Reactions to Medicare and Medicaid .... 

3.9 Reactions to Competitive Bidding 

3.10 Other Payment Mechanisms 

3.11 Sources of Information 



PAGE 



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3-2 




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4-1 
4-2 



4. BOSTON, MASSACHUSETTS 

4.1 The Economic, Demographic and Health Care' 

Environment 

4,1.1 Historical and Regulatory 

Environments ^_c 

4.2 Definition of the Market: Geographic . . ' 4I9 

4.3 Definition of the Market: Cost and 

Utilization 4-10 

4.3.1 Medicare's Market Share ....... 4-10 

4.3.2 Medicaid: A Significant Proportion of' 

Use in Massachusetts 4_X1 

4.3.3 Other State Funding of Home Care 

Services 4-14 

4.3.4 Private Insurance and Self Pay . . . . 4-15 

4.3.5 Uncovered Care • • • ^_i^ 

4.4 Market Concentration .........,,' 4-17 

4.5 Nature of Competition ........... 4-20 

4.6 Price Variation Among Home Health Agencies '. 4-24 

4.6.1 Variation in the Price Paid by 

Medicare 4-24 

4.6.2 Price to Medicaid: Determination and 

, . ^ Variation 4.23 

4./ homie Heaxtn Agency Use Patterns 4-29 

4.8 Reactions to Medicare and Medicaid . .' .' .' ', 4-31 

4.9 Reactions to Com.petitive Bidding ....'.'.' 4-33 
4.10 Sources of Information ........[[, 4-36 



5. CONCLUSIONS AND IMPLICATIONS FOR COMPETITIVE 

BIDDING 

5.1 Introduction 



5-2 

5-2 

5.2 Primary Study Findings and Conclusions . . . 5-2 

5.3 Implications for Competitive Bidding .... 5-17 



APPENDIX A 



CENTER FOR HEALTH POLICY STUDIES 



TABLE OF EXHIBITS 



EXHIBIT 

::o. 

1-: 

1-2 

1-3 A 

1-3B 

1-4 
1-5 

1-6 

1-7 

l-S 



1-9 
1-10 



1-11 

1-12 

1-13 

1-14 

1-15 

2-1 

2-2 

2-3 

2-4 
3-1 
3-2 



TITLE 

NUMBER OF PERSONS RECEIVING MEDICARE AND 

MEDICAID HOME HEALTH SERVICES 

AVEPAlGE NUMBER OF MEDICARE HOME HEALTH * VISITS 

PER USER 

NUMBER OF VISITS PER PERSON RECEIVING EACH* 

VISIT TYPE, 1974-1980 

NUMBER OF VISITS PER ALL PERSONS SERVED BY* 

VISIT TYPE, 1974-1980 

HOME HEALTH REFERRALS '.'.*.*.* 

MEDICARE CERTIFIED HOME HEALTH AGENCIES BY* 

AUSPICES 1972 and 1982 - 84 

NUMBER OF MEDICARE BENEFICIARIES SERVED BY 

TYPE OF AGENCY (000 's) 

DISTRIBUTION OF MEDICARE CERTIFIED* HOME HEALTH 
AGENCIES BY AGENCY TYPE WITHIN GEOGRAPHIC 

DIVISION, 1974 and 1980 

DISTRIBUTION OF MEDICARE CERTIFIED HOME HEALTH 
AGENCIES BY GEOGRAPHIC DIVISION WITHIN AGENCY 

TYPE 1974 AND 1980 

AGENCY SIZE BY TYPE OF AGENCY, 19 82 . *. *. '. '. 
PROPORTION OF HOME HEALTH AGENCIES PROVIDING 
VARIOUS TYPES OF IN-HOME SERVICES JANUARY 

1984 

VISITS PER PERSON SERVED BY TYPE OF AGENCY* '. 
AVERAGE MEDICARE CHARGE PER VISIT - 1974, 

1980, 1982 

MEDICARE REIMBURSEMENT FOR HOME HEALTH* BY 
PROGRAM AND BY TYPE OF ENROLLEE , 1974-1982 . 
HOME HEALTH CARE PAYMENTS UNDER MEDICAID, 

1972-1983 

SELECTED DEMOGRAPHIC AND HEALTH RESOURCE* 
CHARACTERISTICS OF MARKET STUDY SITES, 1983 . 
NUMBER OF VISITS BY TYPE OF SERVICE BY YEAR - 

MEDICARE SACRAMENTO/ STOCKTON 

MEDICARE MJ^RKET SHARES OF SACRAMENTO HOME 

HEALTH AGENCIES 1983 

RANGE AND WEIGHTED AVERAGE CHARGES TO MEDICARE 
BY TYPE OF SERVICE AND TYPE OF AGENCY 
SACRAMENTO/STOCKTON, 1983 (IN DOLLARS) . . . 
DISTRIBUTION OF VISITS IN SACRAMENTO /STOCKTON 
BY TYPE OF SERVICE AND TYPE OF AGENCY 198 3 
NUMBER OF VISITS BY TYPE OF SERVICE BY YEAR - 

MEDICARE NEW ORLEANS 

MEDICARE MARKET SHARES OF NEW ORLEANS HOME 
HEALTH AGENCIES 1983 



PAGE 

1-15 

1-18 

1-19 

1-19 
1-21 

1-23 

1-27 

1-29 



1-31 
1-32 



1-34 
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1-38 

1-42 

1-47 

2-12 

2-15 

2-20 

2-25 

3-9 

3-16 



CENTER FOR HEALTH POLICY STUDIES 



3-3 RANGE AND WEIGHTED AVERAGE CHARGES TO MEDICARE 
BY TYPE OF SERVICE AND TYPE OF AGENCY NEW 
ORLEANS, 1983 (IN DOLLARS) 3-23 

3-4 DISTRIBUTION OF VISITS BY TYPE OF SERVICE AND 

TYPE OF AGENCY 19 83 NEW ORLEANS 3-26 

4-1 NUMBER OF VISITS BY TYPE OF SERVICE BY YEAR - 

MEDICARE BOSTON 4-12 

4-2 BOSTON MEDICARE M^ARKET SHARES OF BOSTON HOME 

HEALTH AGENCIES 1983 4-19 

4-3 RANGE AND WEIGHTED AVERAGE CHARGES TO MEDICARE 
BY TYPE OF SERVICE AND TYPE OF AGENCY BOSTON, 
1983 (IN DOLLARS) 4-25 

5-1 GROWTH IN HOME HEALTH VISITS AT THE THREE MARKET 

STUDY SITES, 1981-1983 ■ 5-7 

5-2 . MEDICARE HOME HEALTH MARKET SHARE AT THE THREE 

MARKET STUDY SITES, 1983 5-11 



CENTER FOR HEALTH POLICY STUDIES 



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EXECUTIVE SUMMARY 

Thin report is part of a larger project funded by the 
Health Care "ir.ancing Administration to design competitive 
bidding sys-ens that can be used by the Medicare and Medicaid 
programs tc purchase home health services. The purpose of this 
study of tr.e ncme health care market is to develop an 
understandir.7 of its industrial structure, how agencies compete, 
and recent -rends in expenditures and service patterns. This 
should assis-: in not only assessing the feasibility and 
attractiveness of competitive bidding strategies, but also in 
designing al-ernative systems that are most likely to achieve 
Medicare ar.i or Medicaid objectives for home health care 
procurement. 

This s-udy focuses on the skilled home health care 
services covered under the Medicare program. Durable medical 
equipment, er. i homemaker and personal care type services not 
covered by Meiicare are not included in the study. Consistent 
with this prczuct definition, only Medicare-certified agencies 
are examined in this report. 

The -e-hodology used involved two primary tasks. Firstly, 
we reviewed c=ta and information available at the national level 
on home heal-r. care market information and trends. Secondly, we 
conducted ir.-ensive market studies in three home health care 
market areas, Sacramento-Stockton, New Orleans and Boston. These 



CENTER FOR HEALTH POLICY STUDIES 



areas were selected for their geographic diversity and their 
diversity in home health care market characreristicH . At each 
site, interviews were conducted with home health acency 
administrators, Medicare intermediary staff, Medicaid staff, 
hospital discharge planners, state regulatory perscr.nel and 
others directly involved in the home health care industry. 

The three market study sites differ witr. respect to 
size, demographics, region, medical care resources and other 
factors. They also differ with respect to several important 
characteristics of the market for home health services, while 
they are similar with respect to others. Brief sur.-.aries of the 
findings from the three market studies are provided below. 

Sacramento- Stock ton 

Sacramento, California's state capital, has a ~etropolitan 
area population of 1.2 million. Stockton, which is 5C miles 
south of Sacramento, has a metropolitan area population of abcut 
400,000. Sacramento/Stockton was chosen as a m.arke- study site 
partly to study home health service patterns in a moderate size 
city and in nearby smaller, but relatively independent cities. 
Four distinct geographic markets were identified in the 
Sacramento/Stockton area: the city of Sacramento, the city of 
Stockton and two smaller nearby cities. Sacramento and Stockton 
are served by different home health agencies. One :f the smaller 



CENTER FOR HEALTH POLICY STUDIES 



J X 



cities. is served by several branch offices of the Sacramento 
agencies while the other is served by two independent agencies. 

The Sacramento/Stockton home health care markets have 
become increasingly competitive, with substantial growth in 
number of agencies, marketing activity and volume of business. 
In 1983, nine Medicare-certified agencies were active in 
Sacramento. In 1984, a total of seventeen were licensed, 
although only fourteen were determined to be active. The number 
of home health visits in Sacramento and Stockton increased by 129 
percent between 1981 and 1983; on a per-capita basis for those 
age 65 and over, it increased from .47 to 1.02 visits. 

The Sacramento home health market is highly concentrated, 
although less so than in the past. The largest agency, a 
Visiting Nurse Association (VNA) , had a 60 percent share of 
Medicare volume in 1983, substantially less than two years 
earlier. The largest five agencies (one VNA and four 
proprietaries) had a combined 95 percent market share in 1983. 
As in each of the market study sites, the primary source of home 
health referrals was hospital discharge planners, with physicians 
a distant second. Perceived quality of service was cited as the 
primary selection criterion among hospital discharge planners; 
price plays little or no role as a selection criterion for 
Medicare, Medicaid and even private pay patients, according to 
referral sources and agencies interviewed. 



CENTER FOR HEALTH POLICY STUDIES 



111 



Medicare represented about 90 percent of total patient 
visits, v.-ith Medicaid and private pay (private insurance and 
self-pay) accounting for the remainder. Medicare charges, v;hich 
vere repor-ed to be used for all payors, tended to be close to 
the Medicare payment limits. Hospital-based agencies had the 
highest charge levels (Medicare payment limits are highest for 
hospital-based agencies) while proprietary agency charges tended 
to be som.ewhat higher than VKA charges. Medicaid payment rates 
v;ere substantially below Medicare limits. Because of the low 
Medicaid payment rates, some agencies indicated that they and 
other agencies sometimes sought to avoid Medicaid patients. 

Agency reaction to the prospect of competitive bidding was 
mixed. All of the agencies interviewed had been exposed to 
competitive bidding, although the bidding system sponsors (HMOs 
and P?Os) had rainiscule market shares. While there was a 
consensus that competitive bidding could produce lov.-er costs, 
several agencies expressed concern about the possibilitv of poor 
quality ser"ice under the system. There was considerable concern 
about quality in a single winning bidder systemi, under which 
there would be no continuing competition among agencies on the 
basis of quality and adequacy of service. 

New Orleans 

The New Orleans metropolitan area is geographically unique 
in that portions of it are separated up to 26 miles by Lake 



CENTER FOR HEALTH POLICY STUDIES 



-IV 



Pontchartrain and by the Mississippi River. The metropolitan 
area has a population of 1.3 rillion persons. The New Orleans 
economy is relatively poor. Ii r.as higher than average 
unemployment, and a large portion of the population (26 percent 
in 1983) is below the poverty level, more than twice that of the 
country as a whole. 

Home health agencies in Louisiana are only minimally 
regulated. State-required qualifications and experience of home 
health care personnel are minimal, much less so than in 
California and Massachusetts. £-ate licensure requirements and 
minimal standards are now being revised. 

Three distinct geographically defined home health agency 
markets have been identified: i:ew Orleans proper, and smaller 
markets on the wesr bank of the -''lississippi River and on the 
north side of Lake Pontchartrain. Kith one or two exceptions, 
all of the agencies actually serving the latter two markets are 
based in those localities, altr.cigh some other agencies based in 
New Orleans said they would serve these outlying .areas if 
requested. 

As in Sacramento, home health care business and the number 
of agencies are each expanding very rapidly. Between 1981 and 
1983, Medicare home health visits increased 109 percent; for 
those age 65 and over, it increased from .69 to 1.38 visits per 
capita. In 1983, there were 14 active Medicare-certified 



CENTER FOR HEALTH POLICY STUDIES 



agencies in the New Orleans metropolitan area. The number of 
agencies had increased to approximately 40 in Septem±)er, 1984. 



r^cii ..■,; 



concentration was less in New Orleans than in 
Sacramento, with the largest agency accounting for 21 percent of 
198 3 .Medicare charges. The combined m.arket share of the largest 
five was 6 9 percent. Of these agencies, four were proprietary 
and one was hospital-based. Medicare volume accounted for 
approximately 95 percent of agency volume, with the exception of 
two government agencies which treated primarily indigent (no-pay) 
and Medicaid patients. Private pay business is minimal in New 
Orleans, accounting for 2 to 5 percent of agency volume according 
to the agencies interviewed. 

Home health agencies compete for referrals, primarily from 
hospital discharge planners and other hospital staff who are 
estimated to acccunt for 75 percent of all patients. Increas- 
ingly, agencies are miarketing to physicians. Provision of 
quality services was cited by both agencies and referral sources 
as the most important factor in attracting and maintaining a 
sizeable market share. Prompt response to requests for service 
and 24 hour on-call capability were also identified as important 
competitive features. Price was reported to play no role in 
competition among agencies. 

Medicare charges varied considerably amiong agencies 
(charges based on costs were high for newer aoencies v;ith high 



CENTER FOR HEALTH POLICY STUDIES 



•^'1 



start-up costs and little volume) but on average were close to 
the Medicare limits. Louisiana Medicaid uses the same payment 
limits as Medicare. 

Agency reaction to competitive bidding was negative. 
Firstly, agencies had little or no exposure to competitive 
bidding and had some initial difficulty in grasping the concept. 
Views v;ere expressed that under competitive bidding, most smaller 
and newer agencies would be driven out of the market, the system 
would not work, local physicians would not tolerate it, selection 
of winning agencies would be based on graft and kickbacks, and 
quality of service would deteriorate. Several agencies expressed 
the view that in the short run costs may be reduced, but that in 
the long run costs would rise because competition would diminish 
as many agencies would be forced out of business. 

Boston 

The Boston metropolitan area incorporates a semi-circular 
area of 1,237 square miles. VJith a population of 3.7 million, it 
is the largest of the market study cities and has the highest 
population density. The central city (Boston, proper) is 
surrounded by numerous smaller cities and towns. Every portion 
of the Boston metropolitan area is identified as part of a 
particular city or town, an important fact for determining market 
definition for the traditional VNA agencies which are 
township-based. 



CENTER FOR HEALTH POLICY STUDIES ' 



Vll 



Ther- 


_s a long tradition of town responsibility for local 


-.■■•elfare that 


- as led to the establishment and to local 


philanthro; _ : 


support for v::As. Proprietary agencies could not 


b-3 Medicare-: 


rr-ified in Massachusetts until recently. This 


fact, alone v 


- rh the long history of VNAs being the primary home 


health pro'.-_i 


ars, explain why VNAs continue to dominate the 


narket . 




Pror:ri 


^^ary agencies tend to define rheir market as the 


entire metric 


:litan area, and some VNAs have expanded beyond 


their tradi-.i 


:nal service areas. However, geographic markets are 


srill best :e 


; a.-.ed by township and other political boundaries, 


within whic.- 


z local VKA is dominant. 


The --z 


Lu-e of home health visits is expanding less rapidly 


in Boston t.-.a 


- -n Sacramento/Stockton and New Orleans, although 


fron a higher 


-ase. Medicare visits increased 62 percent between 


1981 and 19 \: 


On a per capita basis for those age 65 and over, 


visits incr^a 


:ea 55 percent, to 2.11 in 19 83. This was 6 


percent and 1 


. - percent, respectively, above visit levels in New 


Orleans and S 


a cramento/Stockton. The higher utilization in 


Boston may be 


related to the long tradition of locally supported 


social servic 


as and the existence of VNAs in most localities. 


Ther^ 


- ere 48 active Medicare-certified agencies in 1983 


in the Bost:r 


area. As of June 30, 1984, this had increased to 


60. Of the : 


- 30 were VNAs, 10 were proprietary agencies, 8 

CENTER FOR HEALTH POLICY STUDIES 



vrere hospital-based agencies and the remainder were government 
and other ncr.-proprietary type agencies. Most cf the newer 
agencies were either proprietary or hospital-based. 

The largest home health agency has a 23 percent share of 
the Boston rr.etropolitan area market. Each of the five largest 
agencies is a VNA, with a combined market share cf 48 percent. 
While on the surface, this suggests a lower marke- concentration 
in Boston than in the other market study cities, chis is not the 
case. Within the local narrowly defined market areas, the local 
VNA typically has more than half of the market and in some cases 
as much as 5 5 percent of the market. 

Medicaid and private pay volume is larger in Boston 
relative to Medicare volume than in the other market study sites. 
Based on the limited data that were available and on information 
provided by agencies, it is estimated that the Medicaid and 
private pay shares of home health revenues are 15-25 percent and 
5-15 percent, respectively. 

Medicare charge levels are substantially below Medicare 
limits in Boston (and below agency charges in Sacramento and New 
Orleans), especially for the VNAs , which provide nost of the home 
health care in Boston. Medicaid payment rates, based on costs 
but further limited by other factors, are approxir.ately half of 
the Medicare limits. 



CENTER FO« HEALTH POLICY STUDIES 



IX 



As in the other market study sites, most referrals come 
from hospital discharge planners. Eased on discussions with 
discharge planners and agencies, the most important factors 
responsible for referrals re specific agencies are quality, 
prompt accessibility of required services and longstanding 
relationships with specific agencies, generally VNAs. 
Proprietary agencies complained aboui hospital favoritism tcward 
VNAs and -heir inability to obtain referrals from hospital 
discharge planners. 

Reactions by agencies to the prospect of competitive 
bidding were mixed. Most believed tnat the number of agencies in 
the area would decline, and this v;ould result in short termi 
savings. Agencies differed on prospects for long term cost 
reductions. As in Sacramento and New Orleans, m-uch concern was 
expressed about possible deterioration of quality under 
competitive bidding. 

Primary Studv Conclusions 

Based on the three market studies and information obtained 
from HCFA and other sources , a number of primary study 
conclusions were developed. 

• Hom,e health care services represent a small but 
rapidly growing share cf total health expenditures. 
Home health care expenditures have been estimated 



CENTER FOR HEALTH POLICY STUDIES 



at $2.6 billion in 1983, of which 60-70 percent is 
paid by Medicare and an additional 20-25 percent by 
Medicaid. Medicare home health expenditures have 
been growing at an average annual rate of 30 
percent per year since 1974, and will continue to 
grow more rapidly than other health care expendi- 
ture categories. The primary factors responsible 
for this continuing rapid growth are growth in the 
aged population, increasing preference for home 
over inpatient care and third-party payor efforts 
to substitute home care for inpatient hospital and 
nursing home care. 

c The geographic market for home health care services 
in metropolitan areas is typically the entire 
metropolitan area, and may include nearby less 
populated areas. For hospital-based agencies and 
VNAs in some areas, the market may be more narrowly 
defined. 

m Most large cities now have a large and growing 
number of home health agencies. Home health care 
markets are becoming increasingly competitive. 
Between December 19 82 and December 1984, the number 
of Medicare-certified agencies increased from 3,639 
to 5,274, an increase of 45 percent. 



CENTER FOR HEALTH POLICY STUDIES ' 



XI 



• The distribution of agencies by agency type is 
changing. V,"hile \T^As retain the largest market 
share, they are declining in relative ir.portance , 
while proprietary, private non-profit and 
hospital-based agencies are increasing in 
importance. In 1972, hospital-based and proprietary 
agencies represented 12 percent of all agencies. 
In 1984, they represented 47 percent of all 
agencies. 

o Barriers to m.arket entry for home health agencies 
are minimal. Capital and regulatory requirements 
are not substantial. As noted, betv.'een December 
1982 and December 1984, the nuirber of Medicare- 
certified agencies increased by 45 percent. Growth 
in the number of agencies is expected to continue 
through 1985. 

r Com.petition by agencies is prir.arily for sources of 
referral, rather than directly for rhe consumer. 
The most important referral sources are hospital 
discharge planners and other hospital staff (60-75 
percent) , followed distantly by physicians (10-20 
percent) and patients' family and friends (5-15 
percent) . Primary agency selection criteria are 
quality, reliability, range of services, and 



CENTER FOR HEALTH POLICY STUDIES 



XI 1 



availability of services on short notice. Price 
plays al.T.ost no role. 

c Agency costs and charges varied by individual 
agency but appear to be strongly influenced by 
Medicare payment limits. In two of the three 
market sites, agency charges tended to be very 
close to Medicare payment limits. Discussions with 
agencies suggest that the existing Medicare cost 
reimbursement methodology encourages agencies to 
structure their costs to be at or near Medicare 
payment limits. 

In addition to seeking to determine characteristics of the 
home health care market, we sought to draw implications from the 
study findings for possible Medicare and/or Medicaid use of 
competitive bidding. They are stated briefly below. 

1. Growing competitiveness of markets . Home health care 
agencies are becoming more numerous and more 
aggressively competitive. Competitive providers who 
are actively seeking business are more likely to 
respond positively to and submit attractive bids than 
less competitive providers. The more competitive 
environment enhances prospects for success of 
competitive bidding. 



CENTER FOR HEALTH POLICY STUDIES 



XI 1 1 



2. 


Concerns about crualitv. The prospect of reduced 




quality was the r>ajor concern expresscc about 




competitive bidding. Concerns v.-sre raised about 




price being the sole or primary selection criterion, 




of low bidders not being able po adequately provide 




increased volume of services, and of quality and 




patient visit time beinc reduced under the svstem. 




Clearly, assuring adequate levels of qualitv and 




service under the competitive bidding program needs 




uo be a primary objective, both in designing and in 




administering the program. 


3. 


Medicare accounts for most aoenc-.- revenue. In the 


aggregate. Medicare accounts for 60 to ''0 percent of 




home health agency revenue, with Medicaid accounting 




for much of the rest. If a sizeable share of agency 




revenue comes from privare payors, KCFA could be less 




concerned about the impact of its system, on the 




industry and on access to care of private patients. 




However, because of its dominance, HCFA does have to 




be concerned about the effects of its action on 




possible growth of monopoly power, and on costs and 




access to use of others. 


4. 


Medicare limdts do not accuratelv reflect reauired 


resource costs of providina services. There are 


indications, based on cost variability among acencies 




CENTER FOR HEALTH POLICY STUDIES 



and on comments received from agencies, that Medicare 
cost limits do not accurately reflect the necessary 

m 

costs of efficiently providing different home health 
care services. This suggests that prices and relative 
bid prices among types of services under competitive 
bidding may be substantially different from those 
which exist under the current Medicare cost reim- 
bursement system. 

5. Cost reimbursement provides poor incentives and 
results in high administrative costs . Several 
agencies freely admitted that they (like others) 
seek, through cost allocation between allied 
businesses and adjustment of administrative costs, to 
achieve reported cost levels that are close to the 
Medicare limits in order to maximize revenue. In 
addition, many agencies complained about substantial 
administrative costs related to preparing and 
securing intermediary approval of cost reports. A 
simpler system embodying incentives for cost- 
effective provision of services could result in 
substantial savings. 

6. Substantial returns to scale do not exist . While 
most agencies could not accurately describe the 
relationship between average visit cost and volume, 
most indicated that direct labor cost was the primary 



CENTER FOR HEALTH POtlCY STUDIES 



XV 



agency cost, and that fixed cost tended to be 
relatively low. Some economies may be achieved if 
increased volume reduces average travel time. 
However, cost reductions are not likely to be 
significantly different where a single agency 
provides all home health care in a metropolitan area 
or a small number of agencies (e.a., three to five) 
provide the care. 

The implications from these r.arket studies, particularly 
from the information received from, the agencies themselves, 
suggests that substantial program savings could result under a 
v.'ell designed competitive bidding system. But serious, 
legitimate concerns exist about quality, adequacy of service and 
monopoly. They need to be seriously addressed in the design and 
administration of the systems. 



CENTER FOR HEALTH POLICY STUDIES 



1. INTRODUCTION 



CENTER FOR HEALTH POLICY STUDIES 



1. INTRODUCTION 

1.1 Purp ose of the Studv 

Most of the economic and market research that has been 
done on the home health care industry has focused on .Medicare and 
Medicaid program interactions with the here health industry, as a 
whole. Studies sponsored by the federal government and various 
state governments have compared payment levels across states, and 
examined growth in Medicare and Medicaid payments, numbers of 
visits, cosrs per visit and payments by type of provider. 
However, little is known about characteristics of the home health 
market that do not directly relate to the Medicare and Medicaid 
programs. If these programs wish to move to payment approaches 
which rely on competitive market forces, it is necessary to first 
know the shape of those markets, the issues on which they compete 
and how they are likely to be affected by competitive bidding. 
In other words, there is a need for an industrial organization 
type approach -o the study of the industry. To date, v;e are not 
aware of the existence of any such studies in home health. 

1.1.1 Study Objectives 

In developing competitive bidding models for home health 
agencies, it is useful to have an accurate and current oicture cf 
the market and the extent and nature of competition in home 
health care. While our earlier literature review has described 



CENTER FOR HEALTH POLICY STUDIES 

1-: 



and assessed various bidding models and how they have been 
applied in the health care delivery system, this report focuses 
on the particular market into which competitive approaches might 

be introduced. 

To gain this perspective, the Center for Health Policy 
Studies conducted limited studies of the market for hom.e health 
care services in three areas. These studies dealt primarily with 
the economic characteristics of home health care and character- 
istics of the services and service providers. Specifically, in 
each of the market areas we sought answers to the following 
questions : 

• What is the size of the market? 

• What are the geographical dimensions of the 

market? 

• What is the organizational structure of the 
miarket? 

• What are the roles of the various types of 
home health agencies in the market? 

• W'hat are the primary comiponents of agency 
costs? 

• How does cost vary with volume of services? 

• Do market shares differ for Medicare, Medicaid 
and private payor work? 

• On what basis do home health agencies compete -" 
for business? 

• What are the usual staffing patterns of 
agencies? 



CENTER FOR HEALTH POLICY STUDIES 

1 _ ■} 



• What are the prevailing prices and payir.ent 
levels for home health services? 

• How do differences in paynent levels affect 
agencies selecting or avoiding particular classes 
of patients? 

» What is the range of services offered bv 
agencies? 

c What features about the Medicare and Medicaid 
programs do agencies find burdensome or 
problematic? 



1.1.2 Limitations of the Study 

The intent in conducting the three limited m.arket studies 
was not to prepare a single, comprehensive industrial organization 
study of the homie health care industry; rather, it was to develop 
information, data, and an understanding of the industry which 
will be useful in designing a competitive bidding system. 

It is important to note that this document is intended to 
be a background piece only. The home health care industry in a 
given market area has numerous particioants , each v'ith different 
interests and different perspectives. Interviews were conducted 
with a limited number of Medicare-certified agencies, third-party 
payors, state government officials, and referral agents in each 
area. The information derived from individual interviews and • 
reported in this study reflect the perspectives and biases of 
those interviewed and may not necessarily accurately reflect 
conditions in specific market areas or be typical of other market 
areas. In regard to several important issues, conflicting views 



1--1 



CENTER FOR HEALTH POLICY STUDIES 



were expressed. The reader is cautioned against drav/ing precise 

generalizations from such a small interview sample. In an effort 
to mitigate this limitation, and to provide a larger framework in 
v.'hich tc assess the marker studies, we have provided a review of 
the overall home health care industry, its services and its 

participants. 

We have attempted to present a diversity of perspectives 
and believe that a fair degree of balance has been achieved. We 
believe that the primary conclusions reached and reported in the 
final chapter of this report are valid. This report, along with 
associated data and information collected while conducting these 
studies, should not be viewed as ends in themselves, but rather 
as inputs into the overall project effort, designed to help 
produce a superior bidding system. Many of the issues raised in 
the course of this report, such as quality of home health services 
and market restriction under a competitive bidding system, will 
be dealt with at length in later reports to be delivered under 
this contract. 

1. 2 Background - A National Perspective 

In order to assess prospects for Medicare and/or Medicaid 
competitive bidding for home health services, and to design 
systems that will be likely to meet program objectives, it is 



CENTER FOR HEALTH POLICY STUDIES 

1-5 



important to understand the recent trends in the hone health care 
mcustry, and the nature of the current market for home health 
services. Current trends in supply and demand for home health 
services can best be viev;ed at a national level, which also 
provides a context for more micro-level analysis of provider and 
consumer behavior in local home health markets. 

This section sets out the dimensions of the national 
market for home health services. The first issue considered is 
the definition of the product that is exchanged in this market, 
i.e., definitions of home health services purchased by various 
payors. The remainder of -he section describes the market 
actors, including patients, referral agents, providers, and 
payors. Special attention is paid to the im,pact of Medicare on 
price and quantity of home health services provided to its 
beneficiaries . 

1.2.1 Home Health Care: The Product 

In the broadest sense, hom.e health care might be defined 
as care provided to patients in their homes, required because of 
adverse health conditions. However, more restrictive definitions 
are used to specify home health care services covered by public 
and private insurance, and these definitions, in turn, define the 
services supplied by most home health agencies. 



CENTER FOR HEALTH POLICY STUDIES 



Medicare Hone Health Services Definition . 

Medicare home health care services are defined both by the 
recipient patients, who nust be Medicare-eligible and in need of 
skilled care for recovery and rehabilitation after an acute 
illness episode; and by the agencies and professions that provide 
the service. 

Home health care services covered by Medicare include: 

1) part-time or intermittent nursing care provided by 
or under the supervision of a registered 
professional nurse; 



2) physical, occupational, and speech th 



erapy; 



3) rr.edical social services under the direction of a 
physician; 

4) ho-e health aide services primarily provided to 
assist with the patient's personal care, under the 
supervision of a registered nurse; and 

5) medical appliances and supplies (other than drugs 
and biologicals) . 

Services are provided only to Medicare-eligible individuals 



CENTER FOR HEALTH POLICY STUDIES 



requiring skilled care and are aimed at rehabilitation rather 
than provision of continuing in-home support. To he eligible for 
home health services under Medicare, a person must be homebound, 
under a physician's care, and in need of part-time or 
intermittent skilled nursing care and/or physical or speech 
therapy . Care must be prescribed by a physician and provided by 
a Medicare-certified home health agency (either directly or 
through arrangements with others) in accordance with the 
physician's treatment plan. 

To receive Medicare home health services, a patient must 
be enrolled in Part A, which is automatic for most Americans age 
6 5 and over, or Part B, Supplemental Medical Insurance. 
Enrollment in Part B is voluntary, requires payment of a premium, 
and is available to persons age 65 or older or those eligible for 
Part A. Part B can cover Medicare home health services for 
enrolled individuals not covered by Part A. Approximately 95 
percent of those enrolled in Part A also participate in Part B. 
In 19 82, 98.3 percent of all reimbursements for Medicare home 
health services were made under Part A. 



The Omnibus Budget Reconciliation Act (OBRA) of 1980 permitted 
persons to qualify for Medicare coverage based solely on the need 
for occupational therapy. Occupational therapy was eliminated as 
a qualifying service by the Omnibus Budget Reconciliation Act 
(OBRA)of 1981, effective December 31, 1983. 



1-! 



CENTER FOR HEALTH POLICY STUDIES 



Until passage of the Onanibus Budget Reconciliation Act 
(OBRA) of 1980 (P.L. 96-499), several restrictions and 
lir.itaticns existed on the use of home health services. Medicare 
Part A provided home health coverage only to those individuals 
with a prior three-day stay in a hospital or a stay of any 
duration in a skilled nursing facility (SNF) where at least one 
day v/as paid by Medicare. The need for home health care had to 
be related to the illness for which the person received inpatient 
services. A plan for home health care had to be established by a 
physician within two weeks of discharge from the institution, and 
coverage was restricted to 100 visits during the year following 
discharge from the hospital or SNF. 

Part B coverage for home health services was extended only 
to those individuals who did not have a prior institutionalization 
or had exhausted their Part A coverage. Reimbursement was 
restricted to 100 visits in any calendar year. Beneficiaries 
under Part B were required to satisfy an annual deductible of 
S60, and until passage of the recent Social Security Airiendr.ents , 
pay a 20 percent coinsurance on home health services. 

OBRA 1980 eliminated the 100 visit limit under both Parts 
A and B; the three day prior hospitalization requirement under 
Part A; and the $60 deductible under Part B (for home services 
only) . The act also eliminated the requirement that proprietary 
home health agencies could participate in Medicare only if they 
were licensed by states that had licensure laws for proprietary 



1-9 



CENTER FOR HEALTH POLICY STUDIES 



agencies. (Only 27 states had such laws in 1981 [Inspector 

General's Report, 1981].) 

It should be noted that a sizeable proportion of home 
health agencies are not Medicare-certified. These agencies are 
not eligible for Medicare reimbursement. Most of these agencies 
provide homemaker and companion type services, which are not 
covered by Medicare, while some provide skilled home health 
services as well. 

Medicaid Home Health Services Definition . 

Home health coverage was made available to the Medicaid 
categorically needy (usually persons receiving cash assistance 
under AFDC or SSI) in 1970. State Medicaid plans must cover home 
health services for all categorically needy individuals aged 21 
years and older (and those under 21 if the plan offers them 
skilled nursing facilities) , as well as medically needy persons 
(persons who have enough income and resources to pay for their 
basic living expenses, but not enough to pay for their medical 
care) eligible under the Plan for skilled nursing facility 
services. As with Medicare, the recipient's physician must write 
a care plan authorizing home care services and review the plan 
every 60 days. 

At a minimum, the states must offer the following services 

in their home health packages: 



1-10 



CENTER FOR HEALTH POLICY STUDIES 



a) part-time or intermittent skilled nursing services; 

b) home health aide services; 

c) medical supplies, equipment, and appliances suitable 
for use in the home. 

Optional services that the states may choose to be 
included in home health care benefits are physical therapy, 
occupational therapy, speech therapy and audiology. 

In general, Medicaid services are provided by agencies 
that meet the requirements for Medicare certification. This is 
often because both programs use the same certifying body. 

In addition to the mandated and optional services mentioned 
above, states are permitted to include in their Medicaid 
programs, services that are not included in the strict definition 
of home health services. States may apply to the federal 
government to provide an even broader range of home care services 
to all Medicaid eligibles or selected target groups. Section 
2176 of the Omnibus Budget Reconciliation Act of 1981 (P. L. 97-35) 
granted the Secretary of Health and Human Services the authority 
to waive existing statutory requirements in order to permit 
states to finance, through the Medicaid Program, 
non-institutional long-term care services. Only services for 
Medicaid-eligible individuals who v;ould otherwise require 



CENTER FOB HEALTH POLICY STUDIES 1 



placement ir. - skilled nursing facility, intermediate care 
facility or ir. termediate care facility for the mentally retarded 
car. be covere: under the Section 2176 waiver program. 

The ir.-ent of the waivers was to give states greater 
flexibility ir. developing home and community-based delivery 
systems where they would serve as a more cost-effective alterna- 
tive to nursi-g home care. The federal statute specifies six 
services thar states may offer under their waiver programs: case 
-ar.agement, r. zmemaker/home health aide, personal care, adult day 
heal-h care, .-.abilitation and respite care. In addition, states 
r.ay offer oz'r.^r services approved by the Department of Health and 
Kurar. Services so long as they are necessary to avoid 
ins-itutional^zation and are cost-effective. These services may 
or may not he provided by Medicare-certified home health 
agencies. 

As of July 1984, 47 states had submitted 138 waiver 
applications. Seventy-six waivers from 44 states have been 
approved. A review of 26 states whose waivers were approved 
before February 15, 1983, reveals the following: 

1. The groups that are often targeted for the waiver 
are aged and physically disabled. 

2. Tventy-four of the 26 states reguested benefits 
f'r case management, 16 homemaker services. 



1-12 



CENTER FOR HEALTH POLICY STUDIES 



8 hoir.e health aide, 11 personal care, 16 adult day 
health care services, 15 rehabilitation services, and 
17 respite care. In addition, 20 siates requested 
one cr more "other" services - the r.ost frequent one 
being transportation. 

3. More than one-third of the programs for the 
aged/disabled used information pertaining to 
social and environmental factors as part of 
level of care determination. 

Definitions Used by Other Payors . 

Home health care benefits are provided under many private 
health insurance and health m.aintenance organization programs. 
Many private insurers that provide a home health benefit define 
covered home care more broadly than do Medicare or Medicaid. 
While requiring that a patient be in need of skilled care, other 
restrictions, such as those related to extent of service, are 
sometimes more relaxed allowing for services of a m.ore continuous 
nature, including chronic skilled nursing and therapy. At the 
same time, however, total length of treatment may be limited by a 
visit maximum (e.g., 50 visits). Additional services available 
under a relatively small proportion of insurance policies and to 
all self-pay patients are of a less skilled nature, including 
chronic personal care and assistance with activities of daily 
living, homemaker, companion and respite care (services that are 



CENTER FOR HEALTH POLICY STUDIES 



1-13 



not covered under Medicare). In some states, these less skilled 
hor.e care services are paid for by special state funds or Title 
XX of the Social Security Act, or Title III of the Older 

Ar'.ericans Act. 

1.2.2 Market Participants 

The participants in the market for home health services 
are the users of care, the patients; those that act as referral 
agents for home health services, primarily physicians and hospital 
discharge planners; the suppliers of care, the home health 
agencies; and the payors for home health care, most prominently 
the Medicare program, but also including Medicaid and other third 
party payors. Data on non-Medicare portions of the home health 
market are extremely limited. Therefore, this description of 
market participants focuses primarily on the Medicare home health 
segment of the market, which represents the overwhelming share of 
the market. 

Patients . 

The number of patients receiving home health care under 
Medicare and Medicaid has been growing rapidly (Exhibit 1-1). 
The number of Medicare home health users has increased 198 
percent since 1974. It is interesting to note that the number of 
Medicaid users per 1000 recipients increased sharply between 1974 
and 1975, but has been basically stable since 1975, while the 



CENTER FOR HEALTH POLICY STUDIES 



1-14 



EXHIBIT 1-1 



NUMBERS OF PERSONS RECEIVING 
MEDICARE AND MEDICAID HOME HEALTH SERVICES 





Medi 


.care 




Medicaid 




Year 


Nurr±)er of 
Users 
(000s) 


Per 1000 
Enrollees 


Number 
Users 
fOOOs) 


of 


Per 1000 
Recipients 


1974 


. 392.7 


16.5 


144 




6.7 


1975 


499.6 


20.2 


343 




15.6 


1976 


588.7 


22.9 


319 




14.0 


1977 


689.7 


26.1 


371 




16.3 


1978 


"69.7 


28.3 


376 




17.2 


1979 


636.7 


30.0 


359 




16.7 


1980 


557.4 


33.6 


392 




18.1 


1981 


1054.7 


35.2 


401 




18.2 


1982 


1171.9 


39.7 


377 




17.5 



Sources: HCFA , Health Care Financing Prograr. Statistics, 
"Medicare Use of Hone Health Services," Series; 
The Medicare and Medicaid Data Boo}: 19 81 and 19 83, 



CENTER FOR HEALTH POLICY STUDIES ' 



home health rate of use under Medicare continues to increase. 
The relatively high rate of Medicaid recipients' usage of home 
health services is due in part to inclusion of usage for those 
with joint Medicare-Medicaid eligibility. 

Older people are much more likely to use home health 
services than are their younger counterparts, because of their 
physical disabilities, their family situations, and coverage of 
some home health care by the Medicare program. At the time of 
the Health Interview Survey (HIS) in 1979 (Barbara A. Feller, 
"Americans Needing Help to Function at Home," National Center for 
Health Statistics Advance Data, September 14, 1983), 619,000 
persons 65 years of age or older were receiving some type of 
nursing or medical care at home. The rate of use for those 65 
to 74 was 14.8 per 1000 persons, while those 75 and over exper- 
ienced a rate of use of 4 7.3 per thousand. This may be compared 
to a rate of use for the population 18 to 64 of 5.3 per thousand. 

The HIS home health use rates for persons 65 years and 
older are lower than Medicare use rates because the HIS study 
measured use at a specific point in time, while Medicare data 
would reflect home health use at any point during the program 
year. The HIS data show the strong relationship between home 
health care use and age. The study findings strongly suggest 
that the continuing aging of the nation's population, with growth 
of almost 3 percent per year in the number of those aged 65 and 
over, and an even more rapidly increasing number and proportion 



CENTER FOR HEALTH POLICY STUDIES 



1-16 



of those 75 and over, would be expected to increase demand for 

health services at home. 

The average number of visits per user has increased, 
although less rapidly than the number of users. As shown in 
Exhibit 1-2, average number of visits increased from 1974 to 
1976, (20.6 to 22.7), remained relatively stable from 1976 to 
1979 (22.7 to 22.9), and increased substantially from 1979 to 
1982 (22.9 to 26. 3) . 

Data on the average number of visits for persons 
receiving a specific type of visit are shown in Exhibit 1-3A. 
Between 1974 and 1980, there is very little change for each of 
the four types of visits shown. Exhibit l-3b shows the average 
number of visits for all persons receiving any type of visit for 
1974 and 1980. Nursing visits per person receiving any type of 
visit declined, while home health aide and physical therapy 
visits increased. The data in Exhibits l-3a and l-3b, considered 
together, show that there has been a shift among home health care 
users, towards increased use of home health aide' and physical 
therapy services. 

Referral Agents . 

Under Medicare, Medicaid and private insurance, in order 
for home health services to be covered, the treatm.ent must be 
prescribed by a physician. In fact, however, it is usuallv a 



CENTER FOR HEALTH POLICY STUDIES ' 



1-1 



EXHIBIT 1-2 



AVERAGE NUMBER OF MEDICARE HOME 
HEALTH VISITS PER USER 



YEAR 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

1981 

1982 



VISITS 
PER PERSONS SERVED 


20 


.6 


21 


6 


22 


7 


22. 


5 


22. 


5 


22. 


9 


23. 


4 


25. 





26. 


3 



Source: HCFA/Bureau of Data Management and Strategy 



CENTER FOR HEALTH POLICY STUDIES 



J 



1-1 



EXHIBIT 1-3A 



NUMBER OF VISITS PEP. PERSON RECEIVING 
EACH VISIT TYPE, 1974-19S0 



Type of Visit 




1974 


1980 


TOTAL 




20.6 


23. 4 


Nursing Care 




13.9 


13.0 


Home Health Ai 


de 


19.7 


20. 8 


Physical There 


ipy 


10.4 


10.2 


Other ^ 




6.9 


6.7 



Annual Compcunded 
Rate of Grov.-th (%) 

2.2 

-1. 1 

0.9 

-0.3 

-0.5 



EXHIBIT 1-2B 



NUMBER OF VISITS PER ALL PERSO!:S SERVED 
BY VISIT TYPE, 1974-19BC 



Annual Compounded 
Rate of Growth (%) 

2.1 

- 1.2 

7.4 

4.4 

9.8 



Includes speech or occupational therapy, medical social services 
and other health disciplines. 

Source: Bishop and Stassen, 1983. 



Type of Visit 




1974 


1980 


ALL 




20.6 


23. 4 


Nursing Care 




13.3 


12.4 


Home Health 


Aide 


. 4.8 


7.5 


Physical The 


rapy 


2.0 


2.6 


Other-"- 




0.5 


0.9 



CENTfR FOR HEALTH POLICY STUDIES 1 



1-19 



hospital discharge planner who arranges for home health services 
for a discharged patient. This is shown in Exhibit 1-4. 
Based on a recent survey conducted by Frost and Sullivan, Inc., 
60 percent of referrals come from hospital discharge planners, 16 
percent from physicians and the remainder from other sources. 
According to a recent article in Hospitals (NoverrJ^er 16, 1984), 
the role of discharge planning in hospitals has increased since 
the introduction of PPS, as planners are pressured by hospital 
staff to move patients out as quickly as possible. Persons doing 
discharge planning include social workers within the hospital 
social service department, nurses in continuing care departments, 
and, in a few instances, individual primary nurses taking 
after-care responsibility for patients assigned to them for 
in-hospital care. Families, friends and disabled individuals 
themselves also occasionally seek home health care. Referrals 
from other institutions, e.g., nursing homes, are rare. 

Home Health Agencies . 

Home health agencies can be described by type of agency, 
scale of operation (annual volume of visits or revenues) , scope 
of services offered, type of patients served, and degree of 
reliance on various types of payors for reimbursement. Location 
by region and whether urban or rural is also of interest, and 
patterns of service delivery in particular market areas could be 
especially important in assessing potential market segmentation 
and local monopoly under competitive bidding. 



1-20 



CENTER FOR HEALTH POLICY STUDIES 



EXHIBIT 1-4 



Home 

Health 

Referrals 




rfoai & Su(Uv»n, Iac. Su'^vy 



— CENTER FOR HEALTH POLICY STUDIES ' 



1-21 



. As would be expected, the substantial recent increases in 

demand for home health services has been met by home health 
agencies through a combination of increase in size of existing 
agencies and entry of new suppliers. Exhibit 1-5 shows that the 
number of Medicare-certified agencies grew over 65 percent 
between 1972 and 1982, an average annual rate of 5.1 percent. 
Between 1932 and 1984, the number of agencies grew at a 
considerably more rapid rate, 20.1 percent per year. New 
entrants were most likely to be for-profit, private non-profit, 
■ or facility-based rather than traditional VNA and public 
agencies. Although the numbers of agencies in these latter 
categories have declined only slightly between 1972 and 1984, 
their share of the total number of agencies has fallen markedly 
(83 percent in 1972, versus 34 percent in 1984). 

The rapid growth in the number of agencies over the past 
two years, from 3,639 in 1982 to 5,274 in 1984, has resulted in 
increased competition in many markets. However, one factor that 
nay change the nature of competition, is the growth in hospital- 
based agencies. According to a survey of 450 hospital 
administrators conducted by National Research Corporation (NRC) , 
25 percent of all hospitals were offering home health care 
services in 1983 ( Modern Healthcare , December 1984) . In 1984, 
this had increased to 42 percent or more than 2,000 hospitals. 
The survey also found that 60 percent of all hospitals of 300 
beds or more provided home care services in 1984. Data in 
Exhibit 1-5 show the number of hospital-based agencies increasing 



CENTER FOR HEALTH POLICY STUDIES 



1-22 



KXHIIJIT 1-5 



Medicare Certified Home Health Agencies 
by Auspices 

1972 and 1982 - 84 













Average Annual 
Rate of c:han(jr> 




1972^ 


1982'- 


1983^ 


1984^ 


Type of On^nership 


No. Percent 


No. Percent 


No. Percent 


No. Percent 


72-82 82-84 


VNA 


531 24.0 


517 14.2 


520 12.2 


525 10.0 


-0.3 0.7 


Con\biiicd Voluntary/ 
Government 


55 2.5 


59 1,6 


58 1.4 


59 1.1 


3 1 
0.7-^ 0.0 


Government 


1255 56.7 


1211 33.3 


1230 28.9 


1226 23.2 


-0.3 0.6 


Rehabilitation 
Facility-Based 


11 0.5 


16 0.4 


19 0.4 


22 0.4 


3.8^ 17.3^ 


Hospital -Da Bed 


231 10.4 


507 13.9 


579 13.6 


894 17.0 


8. 2 32. 8 


.SNF-nnscd 


7 0.3 


32 0.9 


136 3.2 


175 3.3 


16.4'' 233.9'' 


Proprietary 


43 1.9 


628 17.3 


997 23.4 


1596 30.3 


30. S-* 59.4 


Private Non-Profit 
S Other 


79 3.6 


669 18.4 


719 16.9 


777 14.7 


22.3^ 7.7 


TOTAL 


2212 100.0 


3639 100.0 


4258 100.0 


5274 100.0 


5.1 20.1 



.Source: ^"^"''''^/"'"•Ith Stan.lai .l;; and Quality nuroau; ar, of l)oc.Mnl)Pr 31 of each year 
^I3ase number is less than one percent of total agencies. 
Base number is less than five percent of total agencies. 



CENTER FOR HEALTH POLICY STUDIES 



J 



from 5,07 to 894 between 1982 and 1984. However, these figures 
may understate the true growth in hospital "affiliated" agencies 
because parent corporations of some hospitals are operating home 
health agencies as separate for-profit subsidiaries. These 
agencies would not be categorized as hospital-based but as 
proprietary in the HCFA data shown in Exhibit 1-5. Other possible 
reasons for the discrepancy in hospital-based or affiliated 
agencies are that some of the newer hospital-based agencies may 
not yet be certified and some agencies are not Medicare-certified 
because they provide only specialized services which are not 
covered by Medicare. 

A survey of hospital administrators focused on projected 
areas of hospital expansion ( Hospitals , January 1, 1985). 
Seventy-six percent of hospital administrators indicated that 
they plan to add or expand home health services: a greater 
proportion than for any other of the services mentioned. The 
recent rapid growth in hospital-based agencies at the projected 
continuing rapid growth may change the competitive character of 
the market in many areas. As hospital discharge planners and 
other hospital personnel are responsible for most home health 
referrals, an increasing number of hospitals may be channelling 
patients primarily to their own agencies. In areas where most 
hospitals operate their own agencies, this could cause further 
erosion in the share of the market held by VNAs as well as 
prevent unaffiliated proprietary agencies from achieving 
significant market shares. 



CENTER FOR HEALTH POLICY STUDIES 

1-24 



Another significar.t development in the industry is the 
growth of horr.e health "chains". ' Chains are groups of two or more 
home health agencies tha- are owned, leased or controlled by a 
single organization. Sore chains operate within only a single 
state, while others are national corporations and provide Medicare 
services in multiple states. This puts them in an advantageous 
position to compete for business with multi-state, self-insured 
corporations and insurance companies. In 1983, there were 83 
Medicare-recognized chains (including government chains) repre- 
senting 545 agencies. In 1984, the number of chains grew to 89, 
while the number of chain operated agencies grew to 721, an 
increase of 32 percent. According to Medicare sources, the five 
largest chains were Beverly Home Health Services, Upjohn 
Healthcare Services, Kimberly Services, Medical Personnel Pool 
and Kelly Health Care. These five corporations had 339 home 
health agencies among them in 1984. One of these home health 
chains grew from 31 to 13 4 Medicare-certified agencies in that 
one year. It is further important to note that many corporations 
have other horie care service operations that are either not 
Medicare-certified or provide care to the private side only. 

Along with the increase in numbers of certain types of 
agencies has came an increase in the number of Medicare patients 
served by them. Changes between 1974 and 1982, in persons served 
by agency type are shown in Exhibit 1-6. VKAs and government- 
based agencies are serving a shrinking proportion of Medicare 
cases, while proprietary and hospital-based acencies are 



1-25 



CENTER FOR HEALTH POLICY STUDIES 



expanding their case loads more rapidly than average. In 1974, 

VNAs and government related agencies saw 76 percent of the 
Medicare home health users; by 1982, this proportion dropped to 
55 percent. At the same time, hospital-based and proprietary 
agencies expanded from serving 15 percent of Medicare home. health 
users to 24 percent. Private non-profit agencies originally 
arose in response to HCFA's licensing constraints on proprietary 
agencies, but fell after the restriction was removed. Thus, the 
expansion of supply has been accompanied by changes in the 
configuration of the home health industry, by ownership and 
scale, and other characteristics. 

In the case of each agency type, the response to general 
demand expansion was enhanced by special factors. Proprietary 
providers entered the market, as would be expected, to capitalize 
on expanding home health demand, but initially could not partici- 
pate in Medicare in states that did not license for-profit home 
health providers. Private non-profit agencies were set up to 
meet this condition, and to satisfy perceived community preference 
for service delivery by non-profits. Many observers, however, 
saw them as differing little from explicitly for-profit providers. 
Changes introduced by the OBRA 1980 allowed proprietary agencies 
to participate directly in Medicare even in states in which 
proprietaries were not licensed. Thus, the growth of the private 
non-profit agencies is expected to slow while the growth of the 
proprietaries increases. 



CENTER FOR HEALTH POLICY STUDIES 



1-26 



NUMBER OF MEDICAID] BL3^E1-'IC LAMES 
Sl'JRVED BY lYl^J^ OF AGI'JSCY 
(OOO's) 



EXHIBIT 1-r, 



1974 



1980 



1982 



Agency Type 
VNA 

Comljined Government/ 
Voluntary 

Government 

Hospital-Based 

Proprietary 

Private Non-Profit 
and Other 

TOTAL 



Numl^er of 




Number of 




Number of 


Persons 


Percent 


Persons 


Percent 


Persons 


189.0 


48.1 


376.9 


39.4 


431.9 


18.4 


4.7 


16.2 


1.7 


17.9 


90.0 


22.9 


173.5 


18.1 


197.6 


47.0 


12.0 


113.8 


11.9 


155.1 


12.0 


3.1 


61.7 


6.4 


124.4 


36.4 


9.3 


215.3 


22.5 


244.9 


392.7. 


100.0 


957.4 


100.0 


1171.8 



Percent 


36 


.9 


1 


5 • 


16 


9 


13 


2 


10. 


6 


20. 


9 


100. 






Source: IICFA Notes: Participating Providers and Suppliers of Health Service, 198 1, HCFA, Office of Research 
and Demonstrations; HCFA Publication Number 03161, Septemlxir 1983. 



CENTER FOR HEALTH POLICY STUDIES 



Hospital-based agencies may have been encouraged to a 

lip.ited extent by the establishment of an add-on to cost limits 
for Medicare home health reimbursement, even though the so-called 
dual limits no Icnger exist. More important and as noted earlier, 
mosz patients are referred to home health care by hospital staff 
after discharge. Hospitals, therefore, have ready access to 
patients in need of care. ' In addition, under Medicare's Prospec- 
tive Payment System for hospitals, direct provision of home 
health care by hospitals should become more attractive, since a 
hospital-based agency can allow a hospital to shorten fixed- 
re im^bur semen t , in-patient stays while capturing additional 
cost-based home health payments. 

Exhibits 1-7, 1-8, 1-9, and 1-10 highlight various charac- 
teristics of agencies by type of agency. Exhibit 1-7 shows the 
distribution of agencies by type and by region. It demonstrates 
that different types of agencies are more common in some regions 
than others. VNAs have been the mainstay of the home health 
industry in New England, where they have been, and continue to 
be, a full two-thirds of the agencies in that region. In the 
Middle Atlantic region, a third of the agencies are VNAs but 
government and hospital-based agencies are equally represented. 
Government-sponsored agencies are more common in the Central 
regions of the country, where they make up about two-thirds of 
the agencies. In the Pacific and South Atlantic regions, where 
both the general population and the proportion of elderly have 
been growing, proprietaries and private non-profit agencies have 

Y STUDIES 1 



CENTER FOR HEALTH POLIC 

1-2 8 



EXHIBIT 1-7 

Distribution of Medicare Certified Home Health Agencies by Agency Type 
Withfn Ceogrnphlc Divi.'^ion, loy^i :\n<\ 1 Q80 

Visiting Combined 

Nurse Gov't. S, Hospital Proprietary, 

All Agencies Associations Voluntary Government Based PNP, Other 

1974 1980 197A J 980 197A 1980 1974 198U 197A 1980 T^Ta 1980 

United States 2,329 2,829 22.8 18.0 2.2 1.8 55.7 44.9 11.6 12.2 7.6 23 1 

(100.0%) (100.0%) 

New England 343 317 69.4 66.9 2.6 1.0 19.8 17.0 7.3 6.6 0.9 8.5 

(100.0%) (100.0%) 

Middle Atlantic 282 281 32.9 32.7 1.7 1.8 31.9 26.3 30.5 28.5 2.8 10.7 

(100.0%) (100.0%) 

East North Central 335 433 25.7 19.6 3.3 2.5 56.4 47.3 9.8 11.1 4.8 19.4 

(100.0) (100.0) , 

West North Central 244 345 10.2 5.8 2.0 3.2 71.3 69.6 15.2 13.6 1.2 7.8 

(100.0%) (100.0%) 

South Atlantic 338 404 7.9 9.9 3.6 1.7 73.9 38.9 5.9 7.4 8.6 42.1 

(100.0%) (100.0%) 

East South Central 298 410 3.0 2.2 0.0 1.2 85.2 64.4 7.4 8.8 4.4 23.4 

(100.0%) (100.0%) 

West South Central 254 305 4.3 3.6 0.0 0.0 70.1 56.1 2.7 4.6 22.4 34.8 

(100.0%) (100.0%) 

Mountain 91 127 13.2 7.9 5.5 3.9 56.0 52.8 14.3 18.1 10.9 17.3 

(100.0%) (100.0%) 

Pacific . '. 144 207 21.5 14.9 2.8 0.0 30.6 19.3 18.0 21.7 27.1 43.9 

(100.0%) (100.0%) 



Source: Health Care Financing Administration, unpublished statistics. 



CENTER FOR HEALTH POLICY STUDIES 



J 



ir.oved in to fill patient demand. While they made up only about a 
quarter of all agencies in the entire country in 19 BO, thev were 
43 ana 42 percent of the agencies in those regions. Since 19 EO, 
proprietaries have become more numerous in all regions. 

Exhibit 1-3 further points out the differences in agency 
distribution. It shows that a disproportionate 4 cercent of all 
the V::As in the U.S. are found in New England, while the sun-belt 
South Atlantic has a disproportionate share of the proprietarv 
and private non-profit agencies. The Middle Atlantic region 
appears to be heavily influenced by hospital-based agencies. 

Like most service-producing organizations, heme health 
agencies are more likely to be found in urban areas, which have 
sufficient concentration of patients to make their activities 
worthwhile. In many cases, it is left to government agencies to 
fill needs in rural areas where service pro^'ision must be 
subsidized. According to industry sources, home health care ts 
not a-.-ailable at all in some rural areas. 

Agency size differs systematically by type. As shown in 
Exhibit 1-9, VNAs, historically the oldest and largest type of 
home health agency, tend to be largest in terms of Medicare 
visits per year. Average Medicare reimbursement by agency tyze 
corresponds closely to the number of visits. Thus, VNAs, on the 
average, also receive the largest reimbursements from liedicare , 
although their reimbursem.ent per visit is somewhat below that tf 



CENTER FOR HEALTH POLICY STUDIES 



1-30 



DI.'iTHimJTION OK mUUCAUR CliHTlKIKU llOMi: lUCAI.TM AGENCIl:;; IIY 

GEOGRAPHIC DIVISION WITHIN AGENCY TYPE 

1974 AND 1980 



i-.xiiiiur 1-8 









Visiting 


Combined 














All Arc 


ncles 


Nurse 
Associations 


Gov't 
Voluntary 


Gov 


ernraent 


Hospital 
Based 


Propi 
PNP. 


letary. 
Other 


1974 


1980 


1974 1980 


1974 1980 


1974 


1980 


1974 1980 


J_97_4 


1980 


United States 


2.329 
(100. OZ) 


2,829 
(100. OZ) 


532 510 
(100. OZ) (100. OZ) 


52 50 
(100. OZ) (100. OZ) 


1.298 
(100. OZ) 


1.272 
(100. OZ) 


269 344 

(inn.oz) (inn.oT) 


178 
(lOn.OZ) 


653 
(100. OZ) 


New Fn^Kind 


W..7 


11.2 


44.7 41.fi 


17.3 6.0 


5.2 


4.2 


9 . ) (, . 1 


1.7 


4.1 


Middle Atlantic 


12.1 


9.9 


17.5 18.0 


9.6 10.0 


6.9 


5.8 


31.9 23.2 


4.5 


4.6 


East North Central 


I't.it 


15.3 


16.2 16.7 


21.2 22.0 


14.6 


16. I 


12.3 13.9 


8.9 


12.9 


West North Central 


10.5 


12.2 


4.7 3.9 


9.6 22.0 


13.4 


18.9 


13.8 13.7 


1.9 


4.1 


South Atlantic 


14.5 


14.3 


5.1 7.8 


2 3.1 14.0 


19.3 


• 12.3 


7.4 H . 7 


16.3 


26.0 


East South Central 


12.8 


14.5 


1.7 1.8 


0.0 10.0 


19.6 


20. B 


8.2 10.5 


7.3 


14.7 


West South Central 


10.9 


10.8 


2.1 2.2 


1.9 6.0 


13.7 


13.4 


2.6 4.1 


32.0 


16.2 


Mountain 


3.9 


4.5 


2.2 1.9 


9.6 10.0 


3.9 


5.3 


4.8 6.7 


5.6 


3.4 


Pacific 


6.2 


7.3 


5.8 6.1 


7.7 0.0 


3.4 


3.1 


9.7 13.1 


21.9 


13.9 



Source: Health Care Financing Administration, unpublished statistics. 



CENTER FOR HEALTH POLICY STUDIES ' 



EXHIBIT 1-9 



AGENCY SIZE BY TYPE OF AGE::CY , 15 32 



xype or Agency 
'/i:a 

Combined Government 
Voluntary 

Government 

Hospital-Based 

Proprietary 

Private K'on-Profit 



Average Visits/ 
Year 

21,453 



6,700 
3,663 
6,753 
5,329 
12,021 
8,357 



Average iMedicare 
Reimbursement /Year 

$723,957 



253,559 
119,545 
303,759 
205,328 
423,401 
$299,868 



Source: HCFA, Unpublished data 



CENTER FOR HEALTH POLICY STUDIES 



most other agency types. Government and government-related 

agencies are the smallest agencies in terms of visits and reim- 
burserr.ents. This may partly reflect the usually limited range of 
services offered by these agencies. 

Differences also exist in the scope of services offered by 
the home health agencies. As seen in Exhibit 1-10, while all of 
the agencies provide skilled nursing services (as required by 
Medicare) and most also provide home health aides, other services, 
particularly the therapies, are less routinely available. In 
addition, it appears that while many of these services are 
offered by the agencies, they are not provided directly, but 
through arrangement with other individuals or groups. 

There are little data available that might be used to 
assess whether severity of illness differences exist by type of 
agency. One proxy measure may be number of visits. Referring 
to Exhibit 1-11, proprietary and private non-profit agencies 
appear to provide patients with more visits per person than the 
average for all agencies, but differences among the average 
number of visits per patient by agency type have been decreasing 
over time. Information is not available on referral sources or 
discharge destinations by agency type. 

Finally, differences appear in the average per visit 
charge to Medicare by agency type (Exhibit 1-12) . The growing 
agency types, i.e., hospital-based, private non-profit, and 



CENTER FOR HEALTH POLICY STUDIES 



]-3?, 



EXHIBIT 1-10 



Proportion of ilome Health Agencies ProvitHng Vnrious Types of In-Home Services 

January 1984 



Type of Service Offered 
Skilled Nursing 
Physical Therapy 
Occupational Therapy 
Speech Therapy 
Medical Social Services 
Home Health Aide 
Interns and Residents 
Nutritional Guidance 
Pharmaceutical Service 
Appliances and Equipment 



Total 



By Agency By Contractual 
Staff Ar range, men t 



100.0% 


98.6% 


83.0 


52.0 


49.3 


28.9 


65.4 


35.7 


52.8 


40.4 


94.5 


84.4 


0.8 


0.5 


23.8 


17.8 


6.4 


3.5 


23.0 


11.6 



1.4% 
31.0 
20.4 
29.7 
12.4 
10.1 

0.3 

6.0 

2.9 
11.4 



Source : Health Care Financing Administration, Providers of Service File, unpublished 



CENTER FOR HEALTH POLICY STUDIES 



I 

UJ 



EXHIBIT 1-11 

Visits per Person Served by Type of Agency 

1974 - 1980 

ALL COMBINED GOV'T HOSPITAL PRIVATE 

YEAR AGENCIES VNA AND VOLUNTARY GOV'T BASED PROPRIETARY NON-PROFIT OTHER 

1974 10.6 18.9 18.9 

1980 23.4 22.4 22.4 

1982 26.27 25.5 20.6 

Source: 1974 Data: USDHEW, ORS Health Insurance Statistics , Medicare 
Utilization of Home Health Services 1974" 

1980 and 1982 Data: HCFA, unpublished data 



20.5 


19.3 


31.2 


32.8 


23.8 


20.6 


21.2 


25.7 


28.8 


23.6 


22.3 


22.6 


30.5 


31.8 


26.0 



CENTER FOR HEALTH POLICY STUDIES ' 



I 



EXHIBIT 1-12 
Average Medicare Chanje Per Visit - 1974, 1980, 1982 



AM' COMBINI'JD GOV'T IIUSI'ITAI, 

V]vAR AGr:NCIi:S VNA ANIJ VOIAINTAKY govt BAi;j:;L) pkoprietaky 



•RIVATE 



1974 ■ 


$17 


$16 


$18 


$15 


$21 


$20 


$24 


$19 


1980 


33 


29 


32 


26 


38 


38 


39 


32 


1982 


40 


36 


40 


32 


5 


46 


43 


40 



Source: HCFA, unpublished data 



CENTER FOR HEALTH POLICY STUDIES 



proprietary, have higher per visit Medicare charges than the 

traditional types, VNA and government. Differences in 
average charges may reflect range of services offered by the 
different types of agencies in addition to different organiza- 
tional structures. 

Subcontractors . 

Subcontracting provides a means for home health providers 
to supply services to Medicare beneficiaries without certification 
or direct reimbursement by Medicare. Most subcontractors are 
individual therapists, nurses, and aides, but some are other 
corporations. Exhibit 1-10, presented earlier, shows that 
subcontracting arrangements are most common for physical, speech, 
and occupational therapy, where 35 to 45 percent of the agencies 
supplying these services do so through arrangements with others 
rather than using their own staff. This implies that contracting 
mechanisms are already widely employed in home health. 

Payors . 

Medicare . The growing size of the Medicare home health 
market is shown by the expenditure trends in Exhibit 1-13. The 
exhibit shows that Medicare reimbursement since 1974 has 
increased dramatically. The annual compounded rate of growth 
during this time period has averaged more than 30 percent per 
year. Between 1980 and 1982, this rate of growth has only slowed 



CENTER FOR HEALTH POLICY STUDIES 



1-37 



F.XlliniT 



-n 



HIDTCARK REIMHURSMENT FOR MOMF, HEALTH BY PROGRAM 

AND RY TYPE OK ENKni.l.r.K. lO?/,-!')!)? 

($ rN MILLIONS) 



fot.il Rclnil)ursc-incnt 
Part A 

Pnrt 8 



Total Re trabursement 

ARPti 



Tot.il Reimbursement 
lUsabled 



'I. of Total Medicare 
Reimbursement 



1974 



$132.7 

94.4 
(71. IZ) 

38.3 



I.IZ 



197') 



$207.') 

1 4 5 . f. 

(70. 2j;) 

M . 9 



1976 



$284.5 

200.1 
(70. 3Z) 

84.4 



1 .41 



1.6Z 



1977 

$360.4 

255.1 
(70. 8t) 

105.3 



1.7Z 



Source: Health Care Financing Review, .Summer [98!; 4(4); Kali 1984 6(1) 



197 8 

$431.8 

311 .0 
(72. OZ) 

120.8 



1.8Z 



1979 



1980 



$520.1 

377.7 
(72. 6Z) 

14 2.4 



1.9Z 



$654.4 

473.8 
(72. 4Z) 

180.6 



601.0 
(91. 8Z) 



53.3 



2.0Z 



l')HI 

$81 3. 9 

66 5.7 
(81. 8Z) 

148.2 



748.5 
(92. OZ) 



65.4 



2.1Z 



1^8 2 

$1091. 

1068. 
(97. 




9Z) 



23.3 



Annual Rate of 
(Jrowtli 



1974-82 
30.2 



1003. 
(91. 



4 
9Z) 



87.9 



2.3Z 



1980-82 



29.1 



29.2 



28.4 



CENTER FOR HEALTH POLICY STUDIES 1 



slightly. This exhibit also reflects changes in reimbursement 
due to the introduction of OBRA 1980. Prior to 1981, 
reimbursement for home health services was split 70/30 between 
Parts A and E. After enactment of OBRA, these percentages 
shifted drastically, until, today, almost all home health 
services are provided under Part A. In addition, the exhibit 
demonstrates that disabled persons have, at least in the last few 
years, accounted for little of the home health services 
reimbursement. The Medicare home health market is clearly 
growing rapidly. Home health services currently account for 2.3 
percent of all Medicare reimbursement, a seemingly minor amount, 
until one considers that eight years earlier, this figure was 1,1 
percent. 

Preliminary data for 1983, indicate that rapid growth in 

Medicare expenditures is continuing. According to data supplied 

by HCFA, Medicare home health care expenditures increased 27 
percent in 198 3 over the previous year. 

Home health services under Medicare are reimbursed on a 
reasonable cost basis up to prospectively set limits specified 
under Section 1861 (v) (1) of the Social Security Act. Limits are 
established by type of service and are expressed as costs per 
visit. However, limits are applied to each home health agency as 
a single aggregate limit, based on the agency's sum total of 
num.ber of visits for each type of service. 



CENTER FOR HEALTH POLICY STUDIES 



1-39 



A national schedule of limits on home health agency 
costs per visit is usually published annually with the most 
recent appearing July 2, 1984 (49 FR 27272). The schedule 
specifies, for metropolitan and non-metropolitan areas, a base 
limit for each type of service, first as a total and then broken 
into the labor and non-labor portions. Adjustments are then m.ade 
to this limit in the following manner in order to arrive at an 
agency-specific cost per visit limit: 

1. An adjustment is made to the labor-related component 
by multiplying by the hospital worker wage index for 
that area. This is then added back into the 
non-labor portion to arrive at the adjusted per visit 
limit , 

2. An inflation adjustment to the total is made upward 
that corresponds to the month and year in which the 
agency's cost reporting period begins. 

3. If an agency is hospital-based, an additional 
add-on amount is made to both the labor and non-labor 
portions of the base limit. 

In order to determine the maximum reimbursement for an 
agency, each service-specific adjusted limit is multiplied by the 
number of that type of visit provided. These are then summ.ed 
together to arrive at the maximum allowable agency limit. 



CENTER FOR HEALTH POLICY STUDIES 



1-40 



Medicaid. The second largest purchasers of home health 
services are the state Medicaid programs. Between 1972 and 1983 
Medicaid pay-ents for home health grew from $24 million to almost 
$600 millicn , an average annual increase of 33,5 percent. This 
amount, hcvever , now accounts for only 1.8 percent of total 
Medicaid payr.ents (see Exhibit 1-14). One state. New York, 
accounted rore than three-quarters of all Medicaid-f unded home 
health. The next largest states were Massachusetts - 2.8 percent. 
New Jersey - 2.6 percent, and Georgia - 1.4 percent. All 46 
other states combined contributed 16.4 percent of all Medicaid 
home health payments. 

Medicaid reimbursement practices, along with range of 
services, vary across states, with more than half (27 states) 
piggybacking onto Medicare policies. That is, in these states, 
reasonable ccsts are allowed so long as they do not exceed 
Medicare ra^es. Some states, such as Idaho and Vermont, have 
policies that payments must not exceed the lower of (a) reasonable 
costs as de-.ermined by Medicare, or (b) maximum payments per 
visit, set by a state agency. Minnesota allows customary charges 
which are reasonable, so long as they do not exceed the state's 
Medicaid SNF rate. 

Other Payors . Other payors of home health services 
include private insurance companies and HMOs/PPOs and self-pay 
patients. Increasingly, private payors are focusing on home 
health as a benefit which can reduce inpatient hospital stay and 



CENTER FOR HEALTH POLICY STUDIES 



J 



1-41 



EXHIBIT 1-14 



Year 

1972 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

1981 

1982 

1983 



HOME HEALTH CARE PAYMENTS 
UNDER MEDICAID, 1972-19S3 

Payments (Millions) 

24 

25 

31 

70 
134 
180 
210 
263 
3 3 2 
428 
496 
597 



Average Annual Rate of 
Growth, 1972-1983 



33.5 



Percent of Total 
Medicaid Payments 
0.4^ 

0.3 

0. 8 

0.6 

1.0 

1.1 

1.2 

1.3 

1.4 

1.6 

1.7 

1.8 

15.6 



Source: Health Care Financing Review, Fall 84, 6(1) 



CENTER FOR HEALTH POLICY STUDIES 



reduce overall claims cost. According to sources at the Health 
Insurance Association of America, most group health insurance 
policies do cover home health care. A 1984 survey of private 
group benefit plans, conducted by the Wyatt Company, found that 
71 percent of group policies provided home health care. This 
reflected an increase from only 10 percent, two years earlier. 
The increase in groups providing home health benefits far 
exceeded the increase for any of the other "cost containment" 
provisions reported. Many HMO programs currently also provide 
home health care benefits. However, the use of home health care 
under both of these health benefit groups has been minimal. 
These groups primarily cover younger persons not usually 
associated with the need for home health care, and hence, demand 
for these services has been negligible. Data are not available 
on the extent of self-pay for home health care services, but it 
is thought to be quite small. 

Some payments for home care are also made under the Title 
XX program for services provided to the elderly and low income 
individuals. These services are, however, of a low skilled and 
social service nature, and not the skilled type focused on in 
this report. 

Thus, although the total capacity of the home health 
industry is not limited to that funded by Medicare, and a shift 
in Medicare reimbursement policy could theoretically shift 
suppliers to other markets, Medicare, is by far the largest 



CENTER FOR HEALTH POLICY STUDIES 



1-43 



purchaser of home health services. Medicare payment methods will 
esser.tially determine prices and supply for this industry. 

Total Horr.8 Health Expenditures . As indicated earlier, 
hcrr.e health expenditures are available for the Medicare and 
Medicaid programs, but not for private insurance, direct patient 
payrrient, charitable sources and other payment sources combined. 
Medicare payments increased from $208 million in 1975, to 1,091 
million in 1982, and to about $1.5 billion in 1S83. Medicaid 
payments rose from $70 million in 1975 to $596 million in 1983. 
Predicast, Inc., a marketing research firm., estimates that 1983 
"primary home health care" expenditures were (exclusive of 
durable medical equipment) $2.6 billion in 1983 ( Hospitals , 
December 1, 1984, p. 28). Based on these estimates. Medicare and 
Medicaid combined allowed for slightly over 80 percent of total 
home health care services. Predicast projects that expenditures 
for home health care will increase to $5.2 billion in 1988, and 
to S10.6 billion in 1995. These projections reflect expenditure 
trends over the past few years as well as the underlying factors 
responsible for growth in home health care use: primarily, 
continued rapid growth in the aged population, growing consumer 
preference for home rather than institutional care, and efforts 
under both the Medicare and Medicaid programs to reduce inpatient 
hospital and nursing home usage. 



CENTER FOR HEALTH POLICY STUDIES 



] - 4 4 



1. 3 Overview of Market Study Methodology 

A two stage methodology was employed for the home health 
care market study. First, we evaluated the literature available 
to provide a national perspective of the home health care services 
market. Information and data were sought from publications, 
state and federally-sponsored research, and from direct interviews 
with selected researchers and national representatives. Informa- 
tion sought related to important economic characteristics of the 
home health care industry, including levels of and changes in 
costs, prices, payment levels of different payors, volume, agency 
numbers and size, market area definition, and qualitative informa- 
tion on the ex-ent and methods of agency competition. 

The second stage of the market study was the performance 
of three lim.ited market studies. The studies focused on Medicare 
covered skilled services, provided by Medicare-certified agencies. 
An overviev,' of the methods used in these studies, including site 
selection, persons interviewed, and data collection procedures is 
presented in the remainder of this section. Little information 
is provided on the market for homemaker and other non-Medicare 
covered service, even though many Medicare-certified agencies 
provide these services as well. 

1.3.1 Site Selection 

The three study sites selected, after consultation with 



CENTER FOR HEALTH POLICY STUDIES 



1-45 



KCFA, were Sacrarr.ento and Stockton, California; New Orleans, 
Louisiana; and Boston, Massachusetts. In selecting the study 
sites we tried to achieve sor.e representativeness of the country 
as a whole. Vve sought to identify narkets that not only differed 
geographically, but by size and utilization. Additional factors 
that weighed in the selection process were variability in 
available health resources, predominant agency type in the area, 
numbers of agencies, utilization of services and project staff 
knowledge of the health care system.s in those areas. 

Demographic and health care resource data for each of the 
market sites are provided in Exhibi- 1-15. These data on the 
supply of hospital beds, nursing home beds and physicians, as 
well as population, aged population and population density form 
part of the overall health care environment that may help to 
explain home health care use patterns and market characteristics 
at the market study sites. The exhibit will be referred to in 
subsequent chapters. 

1.3.2 Information Sources . 

At each site we sought interviews with: 



Freestanding/non-hospital Medicare-certified home 
health agencies, i.e., voluntary, governmental, 
proprietary and not-for-profit 

Hospital-based Medicare-certified home health 
agencies 



• Hospital discharge coordinators 



CENTER FOR HEALTH POLICY STUDIES 



l-iiC 



SKI.KCTKI) nmOGKArillC AND IlKAI.Tll KKSOIIKCK ClIAKACTKRliniCS 
OF MARKET STUDY SITES, 1983 



EXHIBIT 1-15 



Population 
Metropolitan 1983 
Area (OOO'a) 



(1) 



Percent of 
Population Aged 
65 and over 



Area In 
Square MlleR 



Hospital Beds 
Persons per per 1000 
Square Mile persons 



Nursing Home 
Beds per 1000 
Persons Age 65 , 
and Over In State 



Practicing 

Physicians 

Per loop 

Persons 



U.S. Total 


230,116 


11.3 


Boston 






NECMA 


. 3,673 


12.2 


New Orleans 






MSA 


1,316 


9.3 


Sacramento 






MSA 


1,197 


9.6 


Stockton 






MSA 


378 


11.3 



3,534,289 



2.429 



2,406 



5,117 



1.415 



65 



1,512 



547 



234 



267 



4.4 



3.7 



5.2 



3.0 



2.7 



64.8 



58.9 



64.7 



49.1 



49.1 



1.7 



2.9 



2.3 



1.8 



1.4 



1. U.S. Bureau of the Census, unpublished data for 1983 

2. U.S. Bureau of the Census , Census of Population , State/Metropolitan Data Book , 1980 

3. American Hosptlal Association, Hospital Statistics , 1984 edition 

4. HCFA, unpublished data, SNF and ICF beds certified as of 1/84 

5. American Medical Association, Physician Characteristics and Distribution In the U.S. , 1983 edition, total non-federal physicians 



CENTER FOB HEALTH POLICY STUDIES 



• state home health associations 

• Third-party payors 

• Medicare and Medicaid program and intermediary 
personnel. 

In each site we conducted between 15 and 25 interviews. 
Several of the interview subjects were extremely helpful, 
supplying copies of state regulations, proposed changes, and 
copies of agency literature and price sheets. Payors were 
particularly cooperative, supplying us with data on expenditures 
for and u-ilization of home health services for their 
beneficiaries. They also provided annual agency cost reports, 
when they were available. 

1.3.3 Data Instruments 

Si;': different interviev^/ guides were developed for the 
different interview subjects, namely: freestanding agencies, 
hospital-based agencies, referral agents, associations, 
regulatory officials and payors. Copies of these guides can be 
found in Appendix A. While all interviewees were cooperative, 
there were some subject areas on which respondents felt 
ill-prepared to provide information. In some cases persons could 
not respo.-.d completely to questions concerning competitive 
bidding because of their unf amiliaritv with it and its 



CENTER FOR HEALTH POLICY STUDIES 



1-41 



applicability in home health. However, all groups questioned 
did, to the best of their abilities, respond fully. 

1. 4 Outline of Report 

The remainder of this report focuses on the limited market 
studies. Chapter 2 presents findings of the Sacramento and 
Stockton, California market site visits. The next two chapters 
address -he New Orleans and Boston markets, respectively. 

Each market report is organized in a similar manner. The 
area is first described in terms of economic, demographic, health 
care and regulatory characteristics. This is followed by a 
discussion of market definition, the nature of competition among 
agencies and patterns of care. Finally, sections are presented 
on market reactions to Medicare and Medicaid regulations and 
reimbursement, and reactions and alternatives to competitive 
bidding. 

The final chapter of this report presents a summary of our 
findings and conclusions. In addition, implications of the 
findings of the market studies on the development of successful 
competitive bidding models is discussed. 



CENTER FOR HEALTH POLICY STUDIES 



1-4^ 



2. SACRAMENTO AND STOCKTON, CALIFORNIA 



Prepared by: 
Nancy Hurwitz and Zachary Dyckrnan 



CENTER FOR HEALTH POLICY STUDIES 



2. SACRAMENTO AND STOCKTON, CALIFORNIA 



1 Economic, Demographic and Health Care Environment 



Sacramento and Srcckton are located in the central valley 
portion of California, wedced between the coastal shore and the 
Sierra Nevada mountains (see map). Sacramento, the major city in 
the Sacramento Metropolitan Statistical Area (MSA) , is located 85 
miles northeast of San Francisco, in the Sacramento Valley formed 
by the junction of the Sacramento and American Rivers. In 1983, 
the population of the Sacramento MSA was 1.2 million, as shown in 
Exhibit 1-15. Almost three-quarters of the population resided in 
Sacramento County, while the remaining resided within Yolo, 
El Dorado and Placer Counties. Stockton, which is 50 miles south 
of Sacramento, had a 1983 population of 378,000. All of these 
inhabitants lived within San Joaquin County. The population 
densities of the Sacramento and Stockton MSAs were 234 and 267 
persons per square mile, respectively, substantially lower than 
the other market study sites. The proportion of the population 
age 65 and older in Sacramento and Stockton was 9.6 percent and 
11.3 percent, respectively, compared to 11.3 percent for the 
United States as a whole. 



The Sacramento area is characterized by a diverse economic 
base formed by a combination of government, manufacturing, and 

agricultural elements. The city is the state capital of 
California and is, thus, a center for governmental activities. 

CENTER FOR HEALTH POLICY STUDIES 



MAP: SACRAMENTO/STOCKTON AREA 



LEGEND 
SUrK3«,rd con»o<<l3tt*C tU!>ttiC«l area (SCSA) 

3t«rxMro rr>«trop<Mrtan itttt«iic«l ar** {SMSA) 

PUc* of 100.000 or fTvo<» Inhabltanli 

Fn«c« of SO.OOO to 100.000 inh«t>nanu 

Pl»c« 0* 25.000 10 50,000 inh«bU«nls 

SWSA c«ntft[ city of 1»^»r than 25.000 lnh»C»r«nti 

Stale capital uno*<iin*0 
An poti1>c«l bounoariM ar« ai of January I. tMO 



$AK fliAsCisCO-OAK 



SAN FRANCISCO-" ^^i 
OAKLAND- '*' 




SAN JOSE s.>,.c.S^ 



CENTER FOR HEALTH POLICY STUDIES 



O- ^ 



Manufacturing in the area produces consumer produc-s, computer 
electronics, and agricultural products. The city is the center 
of wholesale and retail activity in the Sacramento Valley. In 
addition, se-.-eral universities are located in the area, including 
the University of California Medical School and the University of 
California at Davis. 

The economy in Stockton is primarily based en agriculture. 
Other significant sectors consist of food processing, light 
"manufacturing, and military installations. 

The Sacramento MSA has 16 hospitals with a total of 3,269 
beds. This r.eans that there are approximately 3.0 acute care 
beds per 1,0C0 persons, which is substantially belcw the national 
average of 4.4 beds per 1,000 persons (See Exhibit 1-15). The 
supply of nursing home beds in California at 49.1 per 1,000 
persons 65 and over, is similarly below the national average of 
64.8 per 1,0C0 aged persons. (Nursing home data are not 
available on a city or metropolitan area basis.) 

The total number of non-federal patient care physicians in 
the Sacramento MSA is 2,118, or 1 . 8 per 1,000 persons. This is 
about even with 1.7 physicians for the state and 1.7, nationwide. 

The Stockton MSA has eight hospitals with a total of 1,016 
beds, or 2,7 beds per 1,000 persons. The total number of 
non-federal practicing physicians in Stockton is 525, or 1.4 per 
1,000 persons . 



CENTER FOR HEALTH POLICY STUDIES 



.:-4 



2.1.1 Regulatory Environment 

California has traditionally been both a heavily recrulated 
state and a highly innovative state as regards health. While 
health planning and Certificate Of Need have been najor forces in 
shaping health care in California, the State has also legally 
mandated the use of competitive bidding for the purchase of acute 
care services under its Medicaid (Hedi-Cal) program, and 
encouraged the use of innovative hospital service purchasing 
arrangements by private payors. These regulations, however, have 
not been directly (or explicitly) extended to home health. 

In order to be a Medicare certified home health agency in 
California, licensure is required. Discussions with state 
officials and a review of the regulations indicate that licensure 
requirements do not, usually, go beyond these of Medicare certifi- 
cation. One exception may be that qualifications for the Director 
of Nursing and Nursing Supervisor may be more stringent under 
California law. To provide Medi-Cal home health services, the 
agency must be licensed by the state and Medicare-certified. 

It is possible to provide home health services (i.e., be 
licensed) without being certified, if the agency sees only 
private pay patients. However, because the volume of private pay 
patients is very low and many private insurers are now using 
Medicare certification as an eligibility criterion for 
reimbursement, there is little reason for an agency not to seek 



CENTER FOR HEALTH POLICY STUDIES 



certification in addition to state licensure. In fact, no 

ager.cy, to date, has done this. 

State regulations do not appear to favor any one 
particular type of agency. 

Probably becausp ci the strong regulatory environment and 
state-wide experience with competitive bidding, very little 
negative reaction to competitive bidding by any of the parties 
interviewed was encountered. However, many did feel that in 
order to assure adequate levels of quality, stricter regulation 
of successful bidders r.ay be needed. 

Many agencies have lines of business that basically escape 
home health regulation and licensure, and are only covered under 
business licenses. These agencies had private sides that provided 
for continuous staffing, some with lower skilled personnel. 
These groups provided nursing services, homemaker and respite 
services that are not covered under Medicare due to its intermit- 
tent and skilled care rules. Most of these agencies felt this 
separate side of their business was necessary to their survival 
due to increased competition and tightening of Medicare rules. 

2.2 Definition of the Market: Geographical 

The heme health care market is first defined artificially 
by Medicare regulations and state licensing regulations. Medicare 



CENTER FOR HEALTH POLICY STUDIES ' 

2-6 



recognizes a provider's service area as being a 50 mile radius 
around the pro\'ider. Agencies that choose to open other offices 
within that 50-mile radius are licensed separately but certified 
together and are considered branch operations. Using this 
definition, the Sacramento market includes all of Sacramento and 
Yolo counties, the western portions of Placer and El Dorado 
counties and the southern parts of Sutter and Yuba Counties. 
This area is significantly larger both in terms of area and 
population than the Sacramento MSA. A second factor also 
contributes to defining markets. There is a preference of 
referral agents, such as hospital discharge planners, to use 
agencies that have a local interest and a familiarity with their 
comir.unity. A third factor, which is related to the others 
mentioned, is the increased cost of providing services in areas 
that require substantial travel time and expense. These factors 
tend to result in home health care m.arkets -hat are defined as a 
city and its surrounding suburban con^anunities . v;e identified 
four distinct markets in the Sacramento and Stockton area, an 
area that was originally considered to be a single, fairly 
homogeneous market. These markets are: the city o'f Sacramento 
and its surrounding suburbs, the city of Stockton and its 

surrounding suburbs, Lodi and a small community northeast of 

* 
Sacramento . 



The "small community northeast of Sacramento" is not identified 
to preserve the confidentiality cf interview responses for a 
specific provider. 



CENTER FOR HEALTH POLICY STUDIES 



2. 


3 Definition of the Market: Cost and Utilization 




The home health market may also be defined in terms of 


e:- 


pencitures for home health care and volume of services 


Pr 


ovided. Unfortunately, no single repository of these data 


e:- 


ists. 




Total use of and revenues for home health care (as defined 


by 


Medicare) are unknown. However, due to the nature of the 


' in 




percent of all users of home health services are age 65 and 


ol 


der, it is reasonable to assume that Medicare use and expendi- 


tures alone are about equal to the totals. Based on unpublished 


da 


ta obtained from HCFA, Medicare home health expenditures during 


19 


83 were $6.7 million and $1.6 million, respectively, for 


Sa 


cramento and Stockton. For the two areas combined. Medicare 


costs have more than tripled since 1981. 




Originally, data on costs of home health care were to be 


Ob 


rained from Blue Cross of California, the state designated 


Medicare home health intermediary. It was understood that 


Medicare expenditures would be understated using this source due 


to 


the fact that agencies may choose to use other intermediaries. 


Each state has a designated intermediary. In addition, an agency 


ha 


s the option of using an alternate instead of the designated 


in 
... 


rermiediary . For California the alternate is Blue Cross of 

CENTER FOR HEALTH POLICY STUDIES 



2-8 



Iowa. In the instance of proprietary chains, a third choice 
exists. The local office of the chain may use the designated 
intermediary appropriate to rhe chain headquarters. Of the 313 
agencies in California, approximately 250 use Blue Cross of 
Calirornia as their intermediary. Many of the large chains, such 
as Beverly and Upjohn, use other intermediaries. 

Medi-Cal, which individual agencies reported accounts for 
zero to seven percent of their business, had expenditures for 
home health during FY84 of $4,091,710 for the entire state: 
$117,519 was spent in Sacramento County and $62,194 in San 
Joaquin County. For the state as a whole, :-'.edi-Cal program 
expenditures for home health represented less than 0.1 percent of 
rotal expenditures for that period. The relatively low Medi-Cal 
expenditures for home health may be due tc a number of factors. 
First, Medi-Cal clients are usually younger and are, therefore, 
low users of home health. Perhaps more ir.pcrtant, many agencies 
-ake Medi-Cal clients only when they are pressured to do so by 
referral agents because reir.bursement rates are claimed by the 
agencies to be below levels necessary to cover the' cost of 
providing the services. 

Medi-Cal expenditures for home health, cited above, 
probably do not include expenditures for those services provided 
under the Medicaid Home and Community-Based Care Waiver program 
(Section 2176). In California, the 2176 v;aiver Program is called 
the Multi-Specialty Senior Project (MSSP) , and is administered 



CENTtR FOR HEALTH POLICY STUDIES 



through the counties; thus, it is not provided uniformly across 
the state. Counties have the option of providing some, all, or 
none of the services. Further, MSSP services go far beyond those 
of Medicare-recognized services. MSSP services include: 

• Adult social day care 

• Housing assistance 

- Repair 

- Maintenance 

• In-home supportive services supplementation (IHSS) 

- Chore 

- Health care 

- Protective supervision 

• Case management 

- Client assessment 

- Care planning 

- Service delivery 

• Respite care 

- In home 

- Out of home 

• Transportation 

- Regular 

- Medical 

- Escort 

• Meal services 

- Congregate 

- In home 

- Food 

• Protective services 

- Social and reassurance services 

- Therapeutic counseling 

• Special communications 

- Translation 

- Devices. 

These services are provided by both Medicare certified and 
non-certified agencies. Because of the county control of MSSP 
funds, estimates of expenditures under this program were not 
available from state government sources. 

CENTER FOR HEALTH POLICY STUDIES 



?-10 



On the private side, users of home health care can be 
classified into three groups: self-pay, private insurance and 
HMG/PPO business. Agencies interviewed repcrted that these 
together accounted for three to eight percent of their business 
in the Sacra:?.ento and Stockton areas. Blue Cross of California 
indicates little demand for home health benefits among health 
insurance purchasers. Agencies are reporting that the HMO and 
PPO business is growing, but currently represents a minimal 
portion of their market. Many HMOs and PFOs are asking agencies 
to bid competitively to act as their home health agency. 
However, several agencies expressed disinterest in dealing with 
the KMO/PPO competitive process because of ~he extremiely low 
potential patient volume. 

Another measure of the size of the market is the volume of 
services provided. Because of the method of Medicare 
reimbursement, service provision is measured in terms of visits. 
During 19E3, 148,940 home health visits were provided under the 
Medicare program in the areas visited. In Sacramento and 
Stockton 123,291 and 25,549 visits were provided, respectively. 
Average numb>er of visits made to each patient by agencies ranged 
from 16 to 24. 

Exhibit 2-1, provides information on the distribution of 
home health visits between 1981 and 1983. Over the course of 
these years, the total number of visits increased 129 percent. 
Although no radical changes in the distribution of services is 



CENTER FOR HEALTH POLICY STUDIES 



2-11 



EXHIBIT 2-1 



N'U^'JBER OF VISITS BY TYPE 
C? SERVICE BY YEAR - 
MEDICARE 
SACRAMENTO/STOCKTON 









YEAR 




i 




! 1981 


1982 


1983 


TYPE OF 
SERVICE 


Number 


Percent 
of Total 


Number 


Percent 
of Total 


Number 


Percent 
of Total 


Skilled 
Nursing 


31,322 


48.2 


44,117 


45.9 


67,148 


45.1 


Physical 
Therapy 


6,843 


10.5 


11,238 


11.1 


18,749 


12.6 


Speech 
Therapy 


1,999 


3.: 


2,406 


2.5 


3,444 


2.3 


Occupational 
Therapy 


1,737 


o — 


3,303 


3.4 


4,270 


2.9 


Medical 

Social 

Services 


518 


0.5 


1,080 


1.1 


2,441 


1.6 


Home 

Health 

Aide 


22,573 


34.- 


34,017 


35.4 


52,784 


35.5 


Other 


7 


<G.: 


10 


<0.1 


4 


<0.1 


TOTAL 


64,999 


100. c 


96,171 


100.0 


148,840 


100.0 



Source: HCFA, unpublished data 



CENTER FOR HEALTH f»OLICY STUDIES 



2-12 



apparent from the table, indications are that physical therapy 
and nedical social services are increasing in relative 
importance, v;hile skilled nursing is declining. Despite the 
relative decline, the nurrJDer of skilled nursing visits more than 
doubled between 1981 and 1983. The increasing importance of 
physical therapy is reinforced by several of the agencies 
interviewed indicating that they are seeking to specialize 
in rehabilitative care, both for Medicare and non-Medicare 
covered individuals. 



During fiscal year 1984, Medi-Cal provided benefits for 
113, S3o visits state-wide: 3,161 visits m Sacramento County and 
1,632 in San Joaquin County. No further breakdown is available. 

Data on home health services provided are not available 

for private-side users. Based on estimates provided by agencies 

in the Sacramento and Stockton areas, private visits may 
represent approximately 5 percent of total visits. 

2.4 Market Concentration 

As of June 30, 1984, according to HCFA, there were a total 
of 21 Medicare-certified agencies in the Sacramento and Stockton 
area: 17 in Sacramento and four in Stockton. In addition, the 
home health care market may be viewed as being supplemented by 
those groups that offer other home care services not covered by 
Medicare: those of a less skilled and/or continuous nature. 



CENTER FOR HEALTH POLICY STUDIES 1 



l-l 



. In preparing for the market study, however, it was noticed 

that several of the agencies thought to be "active" had ceased 
operation. This was further confirmed during the market study, 
as all of the agencies interviewed indicated that only 14 
agencies were currently doing business in Sacramento. All of the 
originally identified agencies in Stockton were confirmed. 

The market immediately around Sacramento is highly 
concentrated. This is shown in Exhibit 2-2. While there were 9 
agencies which provided services to Medicare beneficiaries in 
1983, 60 percent of the services were provided by a single 
agency, a VNA. The top five agencies in Sacramento accounted for 
95 percent of home health care visits. The distribution by 
charges was virtually identical to that of visits. While the 
voluntary agency had 60 percent of the market, it was reported by 
area agencies that this is a much smaller share of the market 
than it had just two years ago. In fact, all agencies 
interviewed remarked about their shrinking market shares due to 
the entrance of more agencies into the market, particularly 
hospital-based agencies. Some evidence of joint ventures between 
existing hospitals and agencies as a method to increase their 
volume was seen. 

In the smaller cities north and east of Sacramento, the 
market is slightly different. This area is served largely by 
branches of Sacramento agencies. One hospital visited in a small 
town 25 miles from Sacramento that had a large Medicare clientele 



CENTER FOR HEALTH POLICY STUDIES 



0_ 



1-; 



EXHIBIT 2-2 



MEDICARE MARKET SHARES OF SACRAMENTO 
HOME HEALTH AGENCIES 

1983 



TYPE OF AGENCY 



VISITS 



VlvIA 

Proprietary- 
Proprietary 

Proprietary 
Proprietary 



TOTAL 5 AGENCIES 



NUMBER 



PERCENT 
OF TOTAL 



74,080 
20,155 
10,246 

8,139 
4,136 



60.1% 

16.3 

8.3 

6.6 

3.4 



CHARGES 



DOLLARS 



PERCENT 
OF TOTAL 



$3,977,035 

1,138,242 

651,166 

338,617 

213,226 



59.7% 

17.1 

9.8 

5. 1 

3.2 



116,756 



94.7% 



TOTAL ALL 
AGENCIES (9! 



123,291 100.0% 



6,318,286 94.8% 



$6,663,305 100.0% 



Nine Medicare certified aaencies were active in Sacramento -in 
1983. 

Source: HCFA, unpublished data 



CENTER FOR HEALTH POLICY STUDIES 1 



'>- T r 



indicated that they would not use agencies located in Sacramento; 
they insisted upon a local presence. As of August 1984, four 
Sacramento agencies were operating branch offices there - up from 
one, two years ago. This would indicate the potential for 
separate markets in many towns with local hospitals which are a 
substantial distance from another home health care service area. 

Despite their proximity to one another, Stockton is an 
entirely separate market area from Sacramento. Lodi, which is 
approximately midway between Sacramento and Stockton is also a 
separate market. Two agencies serve Lodi, but one, a 
hospital-based agency, has dominated and continues to dominate 
the market. 

In Stockton, four Medicare certified agencies provided 
services to beneficiaries in 1983. The largest agency, a 
hospital-based agency, accounted for 52 percent of Medicare 
visits and 59 percent of charges. The top two agencies accounted 
for 81 percent of visits and 83 percent of charges. 

It is interesting to note that in this market study, with 
the exception of the Lodi market, no one particular type of 
agency really controls the market. While in the past voluntary 
agencies served the bulk of the home health needs, it now appears 
that when sufficient population are present, several different 
types of agencies serve the community. 



CENTER FOR HEALTH POLICY STUDIES ' 



2-16 



2. o Nature of Competition Among Home Health Agencies 

Agencies reported that a critical factor in the market is 
the competition among agencies for referral sources. Hospital 
discharge planners were identified as accounting for the 
cverwhelming majority of home health care referrals, with 
physician? a distant second as a referral source, and relatives' 
and friends third. Since most referrals originate with the 
discharge planner, getting their attention and developing a good 
vrcrking relationship was noted to be the single most important 
element in the eventual success of a home health agency. 
On the o-her side, discharge planners spoke of being bombarded 
v.-ith both litera-ure and phone calls from agencies trying to get 
them to use their agencies. Some discharge people said that 
because of this, they are now refusing to talk with agencies with 
whom they do not already have established relations. 

Each of the discharge planners interviewed was asked on 
what basis home health agencies were selected for referral: how 
critical are price, quality, reliability and other factors in 
selecting an agency. The single most important competitive 
factor cited was the perceived quality of services provided. All 
agencies participate in at least some quality control programs, 
usually those required by Medicare: quarterly utilization review, 
60-day recertif ication review and annual advisory group 
evaluation. However, based on information received from patients 
cr their families, direct discussions with agency personnel or 



2-1 



CENTER FOR HEALTH POLICY STUDIES 



through other means, hospital discharge planners indicated that 
they were able to informally assess which agencies were providing 
services of adequate quality and which were not. 

The second selection criterion was range of services 
offered. Referral agents prefer to use agencies that offer the 
fujl complement of covered services rather than having to select 
one agency to provide skilled nursing and another to provide 
physician therapy. Agencies also thought this was important. 
All of the agencies interviewed provided services in all of the 
six Medicare service areas. In addition, some agencies had 
"expanded" their service offerings to include the so-called "high 
tech" services: Intravenous therapy and Total Parenteral 
Nutrition. Agencies felt that being able to provide all services 
was not only necessary to compete, but was necessary to provide 
for continuity of care - another factor in the competitive force. 

As an indication of the impact of range of services as a 
rr.arketing factor, some negative examples were raised. Most 
notably, some new agencies, in order to gain a foothold, are 
marketing themselves directly to patients on the basis of being 
able to provide, under Medicare, a wide range of services - some 
of which are not actually covered by Medicare - and for a longer 
period of time. When the improper "expansion of benefits" is 
discovered, the agency may be forced to close (or already has 
closed) and services to the patient are terminated, sometimes 
v.-ithout prior notice. 



CENTER FOR HEALTH POLICY STUDIES 



2-18 



other issues important in competing in the home health 

arena include: 



• Personal rapport with referral agents, i.e., 
discharge planners and physicians. 

• Continuity of care - in this case not the ability 
to provide all Medicare services, but to offer 
services not covered, such as private duty nursing. 

• Experience - length of time providing services in 
that area. 

• Availability - provision of services 24-hours a 
day, seven days a week (this is particularly true 
for IV therapy) . This also includes the ability of 
the agency to respond to a request for new service 
in a timely manner, usually within one day. 

© Comm.unity awareness - both knowledge of the 

coiTjnunity based on a local presence, and having the 
community aware of the need for and availability of 
hor.e health care in their area. 

It is important to note that not a single agency indicated that 

price played any role in the competition for home health 

business . 



2.6. Price Variation Among Home Health Agencies 

As noted, price plays no role in competition for Medicare 
home health business. Based on information provided by the 
agencies, price plays little role in the private sector side of 
the business as well. 



Exhibit 2-3 presents the weighted averages and the range 
of charges for visits of agencies in the Sacramento and Stockton 
area, along with the associated Medicare cost caps and Medi-Cal 



CENTER FOR HEALTH POLICY STUDIES 



2-19 



RANGE AND WEIGHTED AVERAGE CHARGES TO MEDICARE BY 
TYPE OF SERVICE AND TYPE OF AGENCY 
SACRAMENTO/STOCKTON, 1983 
(IN DOLLARS) 



EXHIBIT 2-3 



TYPE OF 
AGENCY 








TYPE OF 


SERVICE 








Skilled Nurs 


ing 


Physical Therapy 


Home Hea] tli 


Aide 


TOTAL 


Range 


Avg. 


Range 


Avg. 


Range 


Avg. 


Range 


Avg. 


VNA (2) 


56.14-59.73 


56.54 


53.19-55.12 


53.31 


33.74-35.54 


35.37 


48.63-49.90 


48.72 


Other Voluntary (I) 


57.00-57.00 


57.00 


56.00-56.00 


56.00 


39.00-39.00 


39.00 


54.59-54.59 


54.59 


Government (1) 


55.07-55.07 


55.07 


N/A 


40.26-40.26 


40.26 


53.16-53.16 


53.16 


Hospital-Based (4) 


55.00-76.81 


68.23 


51.86-76.70 


67.85 


35.00-54.92 


48.69 


49.95-69.82 


61.71 


Proprietary (5) 


51.2A-70.06 


55.87 


40.46-81.25 


57.67 


35.91-48.74 


39.45 


41.75-60.46 


49.86 


TOTAL (13) 


51.2A-76.81 


58.39 


40.46-81.25 


56.26 


33.74-54.92 


38.53 


41.75-69.82 


51.06 


Medicare Limits 


57/69* 


55/67* 


43/54* 






Medicaid 


4 3 


40 


21 





*Includes hospital add-on 



Source: HCFA, unpubllslied data 



CENTER FOR HEALTH POLICY STUDIES ' 



reimbursement rates. These "caps" specify, by agency, the 
maximum that Medicare will reirriurse for a particular type of 
visit. Separate limits are determined for hospital-based and 
free standing agencies. As can be seen, average charges tend to 
be close to the Medicare caps. Per visit charges do not appear 
to differ r.uch among the various types of agencies, except for 
hospital-based agencies. Hospital-based agercv charges tend to 
run about 20 percent higher than other agencies. This diversion 
was also seen in prior years for which data were available. 
Further, it can be seen that Medi-Cal rates are far below those 
of either the Medicare caps or the individual agency charges. 
This could explain why agencies are reluctant to take Medi-Cal 
patients . 

According to the agencies interviewed, charges were set at 
their actual costs. It was reported that a few of the newer 
agencies had actual costs that exceeded Medicare caps. Higher 
costs were attributed to high beginning operational costs. 

The actual cost of a visit could be distributed over three 
major categories: labor, transportation and overhead. Labor 
costs included not only wages for the time actually spent with a 
patient, but also travel time, time needed for documentation of 
the visit, and time spent in following up with the patient's 
physician, discharge planner and family. The second largest 
component of cost was overhead. Several agencies noted that 
despite the service being offered in the home, a lot of office 



CENTER FOR HEALTH POLICY STUDIES 



2-21 



space was needed so that provider personnel had a place for 
dccumer.tatior. and follov;-up activities, and space was required to 
-aintain patient records and other files. As r.ight be expected, 
transportation was another significant cost component. Medical 
supplies and pharmaceuticals, and general and administrative 
rests were considered minor contributors to the entire cost of a 
\- i s i t . 

Several agencies did comment on the adequacy of the 
"Medicare limits for certain types of visits. Generally, it was 
felt that reimbursement levels for the therapies (i.e., physical, 
occupa-ional and speech) were too low. Most agencies do not have 
these personnel directly on staff, but instead have individual 
contracts with therapists. Because these personnel are in short 
supply and therapy visits tend to be relatively long, actual 
costs are sometimes higher than Medicare caps. On the other 
hand, one agency felt that reimbursement for skilled nursing 
visits m.ay be too high because visits may be relatively short. 

In all of the agencies visited. Medicare represented the 
bulk of their business, generally 80 to 95 percent. Because of 
this, pricing policies and administrative policies for all 
patients conformed with Medicare regulations and payment 
policies. Private payors were usually charged the same as 
Medicare. Of those few agencies that did use different pricing 
policies for Medicare and non-Medicare patients, the difference 
v.-as that private patients were charged on a per-hcur rather than 



CENTER FOR HEALTH l>OCICY STUDIES 



a per-visit basis. Agencies that did this reported that their 
charges were comparable for visits of the sarr.e length of time. 

Only one agency reported higher charges for private pay 
patients than for Medicare - approximately 10 percent higher. 
The explanation provided indicated that they had to charge 
private pay patients a higher rate because collection costs wore 
higher and insurance coverage v/as often uncertain. 

2. 7 Home Health Agency Use Patterns 

Currently, most patients are referred to home health 
agencies by hospital discharge planners. A distant second 
referral source is direct physician referral. Family, friends 
and others also m.ake some referrals. Many agencies are trying to 
alter this referral pattern by appealing directly to physicians, 
but efforts are still too new to discern any significant shifts. 

Most referral agents may choose several agencies to deal 
with and then rotate referrals among them. This is not, however, 
the case with discharge planners in hospitals with their own home 
health agencies. In these facilities, referrals are made to the 
hospital-based agency unless otherwise indicated by the physician 
or requested by the patient. This obviously has implications for 
the future of independent home health agencies as more hospitals, 
seeking to expand their service and revenue bases, open their own 
home health aaencies. 



CEMTER FOR HEALTH POLICY STUDIES ' 



. Another factor affecting the use and referral patterns of 
home health is the introduction of DRGs . All agencies reported 
having a greater number of referrals since DRGs were adopted. 
Because hospitals are concerned about length of stay, patients 
are being discharged earlier and many are requiring home health. 
Several agencies noted that not only are they seeing more 
patients, but the patients being seen are sicker and require more 
services, i.e., service intensity is greater. 

With the exception of the voluntary and governmental 
agencies, actual service use is uniform across agency types. 
Skilled nursing and home health aide visits are most frequently 
provided, accounting for approximately 80 percent of all visits 
(See Exhibit 2-4). Therapies, together, accounted for around 19 
percent of all visits, with physical therapy most common. 
Medical social services visits, perhaps because of reported 
uncertainty of reimbursement, accounted for only about one 
percent. These percentages may indicate actual need for specific 
services. On the other hand, the observed usage pattern may in 
part reflect Medicare coverage and payment policies. 



2. 8 Reactions to Medicare and Medicaid 

In Sacramento and Stockton, there were considerable and 
consistent home health care agency complaints about Medicare 
reimbursement and regulation. Problems voiced about Medi-Cal are 



CENTER FOR HEALTH POLICY STUDIES 1 

2-24 



DISTRIBUTION OF VISITS IN SACRAMENTO /STOCKTG:; 

BY TYPE OF SERVICE AND TYPE OF AGENCY 

1983 



EXHIBIT 2-4 



TYPE 0? SERVICE 



Skilled Nursing 



Physical Therapv 



Speech Therapy 



Occupational Thera 



EL 



Medical Social 
Services 



Home Health Aide 



Other 



TOTAL 



Total number of visits 



AGENCY TYPE 



VNA Voluntary Governnerit Hospital-Based Proprietary 
43.2% 29.0% 90. 6^', 52.:-: 44.7% 



14.5 36.2 



3.0 18.1 



3.3 



1.3 



Total number of agencies 



0.1 



5.9 



0.9 



34.6 10.0 



0.0 



100.0 100.0 



81,4^8 221 



N/A 



N/A 



N/A 



N/A 



9.6 



N/A 



100.0 



478 



11.1 



2.C 



1. 



31. £ 



O.C 



100. c 



22,715 



9.8 



1.: 



2.8 



2.1 



39.3 



0.0 



100.0 



43,948 



Source: HCFA, unpublished data 



CENTER FOR HEALTH POLICY STUDIES 



/.- Z-j 



best expressed in the phase, "Too little, too late." Agencies 
consistently commented that while the same services as covered 
under Medicare are covered under Medi-Cal, payment for those 
services was too low and it took too long to be paid. 

Problems with Medicare can be viewed as falling into one 
of three broad categories: 

• General and administrative 

• Intermediary 

• Fiscal. 



By and large, agencies felt that Medicare regulations are 
too restrictive and inflexible. They feel caught between the 
hospital's need to discharge early and their limitation of 
providing only intermittent care. Further, they feel that rules 
that allow them to only provide care to improve the status of the 
patient are counter-productive. All too often, several agencies 
claim, they are bringing patients up to a good functional level 
and then are not able to provide the care to maintain them at 
that level. Instead, the patient regresses until he/she is 
readmitted to a hospital and/or admitted again to home health to 
bring the patient back up to the earlier functional status. 
Because of this cycle, they believe that Medicare should provide 
coverage for maintenance care under its home health benefit 
program. 

-" — CENTER FOR HEALTH POLICY STUDIES - 



2-26 



Criticism was also directed towards the program adminis- 
trati-e requirements. Agencies cited too r.uch paperwork and 
documentation as a cause for significant care costs. One agency 
described the current Medicare administrative system as "[one] 
designed for the fiscal end and not for good and efficient 
patient care . " 

Many of the problems attributed to the intermediary are 
related to the lack of a clear and uniform definition of what 
constitutes intermittent care. Agencies claimed that they were 
never sure of what length of time and what intensity of services 
were allowed under the "intermittent rule". This was exacerbated 
in California due to the recent consolidation of the interm.ediary , 
Prior to January 1, 1984, two Blue Cross Plans operated as 
Medicare fiscal intermediaries in the state. Since that time, 
all home health functions have been consolidated and assigned to 
what used to be Blue Cross of Southern California. So along with 
the on-going ambiguity regarding the definition of intermittent 
care, agencies in the Sacramento and Stockton area stated that 
they are having to learn how a new intermediary interprets all of 
the regulations. 

In addition to definitional problems, some agencies 
complained about the new Medical Review system instituted by the 
home health intermediary in California. In the past, the 

responsibility for review rested with the intermediarv : all 
providers were required to submit a 20 percent random sample of 



CENTER FOR HEALTH POLICY STUDIES 



open cases. Under the new system, some agencies will submit 100 
percent of medical records and treatment plans for review, while 
some agencies will have no on-going review by the intermediary, 
but will still have to do internal medical review. Agencies with 
no prepayment review have had the onus for medical review shifted 
to them and several complained about this new responsibility. 
Seme agencies with 100 percent review charged that documentation 
and copying needed for review were unrealistic and costly, 
particularly for new agencies (all new agencies are in the 100 
percent review group) . Consensus among the agencies was to 
return to the earlier Medical Review program. 



Concerning reimbursement, the following comments were 



made : 



• Length of time to payment is too long; 

• Fiscal auditors sent by the intermediary are not 
familiar with hom.e health; 

• Allocation of costs are unfair to the agencies, 
particularly those that have other separate but 
attached businesses. 

In addition, and as cited earlier, many agencies felt that 
payment for services often did not reflect actual costs of 



2-28 



CENTER FOR HEALTH POLICY STUDIES 



providing the service. In particular, agencies felt that 
reimbursenent for the therapies 'was underestimated. 

Problems with retrospective denials were also raised. 
Several agencies cited examples of new rulings/interpretations 
being made by the intermediary and being applied retroactively. 
This means that agencies provided services on the knowledge and 
assumption that they were allowable services at the time 
provided, only to have them denied later because of retroactive 
application of new rules. Some agencies suggested that a 
preauthorization system be used to avoid this type of problem. 

All of the criticisms made by agencies concerning Medicare 
and Medicaid payment system policies should be considered in 
light of providers almost always reacting negatively to payment 
restrictions. Yet current fiscal realities and the potential for 
excess utilization when services are provided at no cost to the 
beneficiaries requires that some restrictions be imposed. 
Clearly, some would be required under any payment system 
envisioned. 

2. 9 Reactions to Competitive Bidding 

The concept of competitive bidding was neither shocking 
nor novel to persons interviewed for the Sacramento and Stockton 
market study. As already noted, health care in California is 
both more regulated and more competitive than in most sta-es, and 



2-29 



CENTER FOR HEALTH POLICY STUDIES 



the idea of the government using competitive bidding to purchase 
acute care services under Medi-Cal is not unknown. In addition, 
all of the home health agencies interviewed have been directly 
exposed to competitive bidding because the HMOs/PPOs (of which 
there are many in the state) have approached the agencies to bid 
competitively to serve as the home health care provider for their 
group. 

Despite agency familiarity with competitive bidding and 
the feeling that it did have the potential to reduce costs in the 
short-run, agencies did have some concerns about competitive 
bidding. They did believe that this payment method could be used 
to purchase home health services, but that the side effects may 
be less than desirable. The single winning bidder model was 
generally considered unacceptable. One reason cited was that 
there would no longer be competition of any kind if only one 
agency provided services. Multiple winners was more acceptable 
except that it was felt that it would result in reduced scope of 
services being offered and less time being spent with the 
patient. It was also believed that some agencies would provide 
unrealistically low bids just to get the contract. Finally, 
agencies felt that the larger and/or chain agencies would have 
the most success in competitive bidding. Because home health is 
primarily a service for the elderly covered under Medicare, all 
other agencies would be driven out of business. 



CENTER FOR HEALTH POLICY STUDIES 

2-30 



Perhaps the greatest concern raised was that of quality. 
If -he sys-e.-n is based purely on price, how would you maintain or 
ensure quali-y services? VJhat incentives would there be for a 
sele:-ed agency to take a complicated case? Every person 
interviewed felz selection based purely on price would not only 
be had for the non-winning agencies, but would be disastrous for 
the patieni. Crher factors they felt were important to consider 
include: 

• Scope of service 

• Credentials of staff 

• Hours of coverage 

• Geographic area covered. 

No specific recommendations were made on how to ensure quality. 

2 . IC ether Payment Mechanisms 

Agencies generally agreed that the current pa\Tnent system 
of cost reimbursement was not really good for either the agencies 
or KCFA. They realize that cost reimbursement provides minimal 
incentives for efficiency and cost-effective provisions of 
services. In fact, keeping "costs" at or near the Medicare 
limits, by increasing expenses or changing cost allocations is an 
important objective of many agencies. In addition, agencies did 
not like cost reimbursement because of the risk of retrospective 
denials, Acer.cies describe the move away from cost reimbursement 



CENTER FOR HEALTH POLICY STUDIES 



2-3] 



as inevitable and necessary. Suggestions made as to alternatives 

to cost reimbursement did not include competitive bidding, but 
did include: 

o Fee schedule - where any agency able to meet the 
schedule would be recognized; 

• Prospective payment system based on capitation; 

• DRG-based system; 

• System based on an aggregate per visit cost. 

2.11 Sources of Information 



A variety of sources of information were used in 
developing a description of the Sacramento and Stockton market. 
These included aggregate data an costs and utilization from 
payors and individual cost reports of the agencies visited. In 
addition, a variety of people were interviewed about home health 
care in Sacramento and Stockton, California. These included: 

• Staff member, Blue Cross of California 

• Staff member, Medi-Cal program 

• S-aff member, Medicare intermediary (Blue Cross of 

California) 

• Executive Director, state home health agency 
association 

• Executive directors of two voluntary home health 
agencies 

• Directors and/or administrators of four proprietary 
home health agencies 

• Directors of three hospital-based agencies 

• Discharge planners at four hospitals 

• Chief, Licensing and Certification, California 
Department of Health Services. 



CENTER FOR HEALTH POLICY STUDIES 



?-3: 



3. NEW ORLEANS, LOUISIANA 



Prepared by: 
Nancy Hurwitz 



CENTER FOR HEALTH POLICY STUDIES ' 



3. NEW ORLEANS, ■ LOUISIANA 

3. 1 Economic, Denographic and Health Care Environment 

The New Orleans metropolitan area is geographically unique. 
Occupying 2,406 square miles, its northern edge is separated 26 
miles from, the city by Lake Pontchartrain , and its southern parts 
are ser apart by the Mississippi River and several other major 
waterways (see map) . It includes the parishes of Jefferson, St. 
Bernard, St. Tammany, St. Charles, St. John the Baptist and 
Orleans. New Orleans, located in Orleans Parish, is the second 
largest port in the nation and a major national and international 
trade center. 

Approximately 1.3 million persons live in and around New 
Orleans, making it the largest city in the state. Of this 
population, 9.3 percent are aged 65 and older, less than the 
naticnal rate of 11.3 percent (see Exhibit 1-15). 

In spite of its being one of the busiest ports and shipping 
areas in the world, the general economy of the area is poor. In 
1983, the unemployment rate was 10.4 percent, compared to 9.6 
percent for the nation. The state of the economy is further 
reflected in the percentage of persons living in poverty. During 
the m.ost currently available year, 26.4 percent of the population 
in the New Orleans area were living below the poverty level — 
more than twice that of the country as a whole. 

CENTER FOR HEALTH POLICY STUDIES ' 



3-: 



M 

UJ 

5 



>■ 
O 




o 

a. 

z 
I- 



ae 
O 
u. 

s 

Ui 

►- 

s 

U 



3-3 



The New Orleans health care sector includes two major 
medical schools - Tulane and Louisiana State University. 
In addition, the area has 27 community hospitals, including a 
large, state-operated hospital for the medically indigent. 

There are 5.2 hospital beds per 1,000 population in New 
Orleans, compared tc 4 . 4 beds for the United States as a whole. 
Further, most hospitals are operating with low occupancy rates of 
between 45 and 60 percent. The supply of nursing home beds per 
1,000 population 65 and over in Louisiana of 64.7 is virtually the 
same as for the United States as a whole. With 3,088 patient care 
physicians in the area, there are 2.3 physicians per 1,000 
population (see Table 1-15) . 



3.1.1 Regulatory Environment 

Historically, Louisiana health care has not been heavily 
regulated. There is no Certificate of Need program and health 
planning in the state has been basically ineffective. An example 
of this is the severe over-bedding both within the state and New 
Orleans, specifically. Because of these excessive supply 
conditions, the Governor recently declared a moratorium on the 
state licensing of any new health facilities. 

State regulation of home health agencies does not go beyond 

that required for .Medicare certification. In fact, current 



CENTER FOR HEALTH POLICY STUDIES 



3-4 



minimum. standards for home care agencies are very vague. 
Required qualifications and experience of home health care 
personnel who directly provide the services are minimal, relative 
to other states. No qualifications are specified for the 
administrator or supervisory personnel. 

Because of the above shortcomings and other vagueries of 
home health care regulation, the State, with the aid of the 
Louisiana Home Health Association, is now revising the licensure 
requirements and minimum standards. A review of the proposed 
regulatory changes indicates greater specificity, but still not 
the stringency of California regulations. 

The process for licensure in Louisiana is as described 
below. An agency makes written application for licensure. 
Currently, because so many groups want to enter the home care 
business, a provisional license to operate a home health agency is 
granted for a period of not more than 90 days, after a desk review 
of the written application. Approxi-ately six to eight weeks 
following this licensure, an on-site survey of the agency is 
conducted for final licensure, and if appropriate. Medicare 
certification. 

Licensure regulations and minimum standards do not appear 
to favor any one type of agency. 



CENTER FOR HEALTH POLICY STUDIES ' 



3-5 



Medicare certification in Louisiana does require state 
licensure. Medicaid requires that the agency be both licensed and 
Medicare certified before it can be certified by Medicaid to 
provide services tc Medicaid recipients; unlike Medicare, however, 
Medicaid staff do -heir cvn certification inspections. 

As in Calif crnia, certification is not necessary for 
licensure. Licensed-only agencies may only serve private pav 
patients. In contrast to California, several agencies in the 
state do operate on a licensure-only basis. Two of the agencies 
are in New Orleans. 



3. 2 Definition of the Market; Geographical 

Natural boundaries formed by Lake Pontchartrain and the 
Mississippi River have helped define the several heme health care 
markets in the New Orleans metropolitan area. Three main markets 
have been identified: 

• New Orleans proper 

• "V'7estbank" of the Mississippi River 

• Northside of Lake Pontchartrain. 

In addition, some of these large market areas are further broken 
down into more local areas. This was particularly true across the 
Lake. Persons interviewed there stressed that a local presence 



CENTER FOR HEALTH POLICY STUDIES 



3-6 



was absolutely necessary because clients often lived in unmarked 
areas requiring intimate knowledge of the area. Thus, on the 
north side of the Lake, at least two markets exist: Covington and 

Slidell. 

The New Orleans proper area is geographically quite large. 
Hov.-ever, it appears that it represents a single market area. Even 
Chalmette and Kenner, some 30 minutes from downtown New Orleans 
were considered the same market. One issue peculiar to this 
market is service to the "Projects". Many of the city's poor and 
elderly live in these areas and are being inadequately served due 
to agencies' unv/illingness to see patients there. The basic 
reason cited is that of safety of personnel. 

Agencies on the Westbank appear to serve a larger 
geographic area than do other agencies in the metropolitan area. 
They are often called upon to see patients who live in areas as 
far as 30 to 40 miles away. In addition, this market was also 
served by two New Orleans based agencies until recently. With the 
opening of a hospital-based agency on the Westbank, only one New 
Orleans based agency continues to serve that market. 



3. 3 Definition of the Market; Cost and Utilization 

Aside from geographical limits, the market in the New 
Orleans area may also be defined by home health care expenditures 



CENTER FOR HEALTH POLICY STUDIES 



3-7 



and volume of home health services. In Louisiana, there are four 
distinct groups of home health service consur.ers: 

• Medicare 

• Medicaid 

• Medically indigent 

• Private pay, including self-pay and private 
insurance. 

Data on these groups of users are not collected in the aggregate 
by any single source. Therefore, to obtain some indication of the 
extent of the market, groups must be examined individually and 
pieced together to form a picture of the whole. Examination of 
the use and revenues expended by each of the above groups is 
presented in the following paragraphs. 

Medicare patients represent the largest income source to 
Louisiana home health agencies. Except for state and local 
governmental agencies, care provided to Medicare patients 
accounted for approximately 95 percent of all agency revenues, at 
those agencies interviewed. During 1983, 7.6 million Medicare 
dollars were spent for home health in the New Orleans metropolitan 
area alone; a growth of 146 percent in just 3 years. Additional 
Medicare expenditures data are presented below in the discussion 
of market concentration. 

As shown in Exhibit 3-1, the number of visits provided to 
Medicare clients has also greatly increased since 1981. 



CENTER FOR HEALTH POLICY STUDIES 



3-9 



EXHIBIT 3-1 



NUMBER OF VISITS BY 
TYPE OF SERVICE BY YEAR - MEDICARE 
NEW ORLEANS 









YEAR 






TYPE OF 
SERVICE 


1981 


1982 


1983 


Number 


Percent 

of Total 


Percent 
Number of Total 


Number 


Percent 
of Total 


Skilled 
Nursing 


22,414 


28.9% 


38,771 30.6% 


48,751 


30.0% 


Physical 
Therapy 


14,949 


19.2 


24,433 19.3 


32,096 


19.8 


Speech 

Therapy 


1,470 


1.9 


2,621 2.1 


3,105 


1.9 


Occupational 
Therapy 


131 


0.2 


627 0.5 


1,685 


1.0 


Medical Social 
Services 


132 


0.2 


496 0.4 


773 


0.5 


Home Health 
Aide 


38,426 


49.5 


59,866 47.2 


75,769 


46.7 


Other 


146 


0.2 


28 0.1 


157 


0.1 


TOTAL 


77,668 


100.0% 


126,842 100.0% 


162,336 


100.0% 



Source: HCFA, unpublished data 



CENTER FOR HEALTH POLICY STUDIES 



3-9 



Some small shifts in the distribution of services provided 
may also be observed in Exhibit 3-1. While home health aide 
services continues to be the most frequently used service, its 
proportion of total visits declined from 49.5 percent to 46.7 
percent over the two year period. At the same time, physical 
therapy, occupational therapy, skilled nursing and medical social 
service visits each increased in relative imcortance. 

The second largest group of patients receiving home health 
services is that of Medicaid recipients. Medicaid coverage for 
home health services differs from that of Medicare. In Louisiana, 
only skilled nursing, physical therapy and home health aide 
services are included in the Medicaid home health benefit. 
Further, Louisiana does not participate in the Medicaid "2176" 
Waiver Program (Home and Community Services) . However, unlike 
Medicare, which requires that patients receive a skilled service 
in order to be eligible for aide services, Medicaid patients may 
receive aide services alone. Thus, patients who qualify for both 
Medicare and Medicaid (cross-overs) and need only aide services, 
would use Medicaid home health benefits. Cne final' difference 
from Medicare is that Medicaid home health visits are limited to 
50 per year. 

Louisiana Medicaid reimburses for home health services at 
the same rate as Medicare. In fact, cost review for Medicaid is 
piggy-backed onto the Medicare cost review and is done by the same 
intermediarv. 



CENTER FOR HEALTH POLICY STUDIES 



3-10 



During FYS 3, total Medicaid expenditures for home 


health in 


the state were $1,195,4 28. Payments were distributed as 


follows: 


Skilled Nursing 


$518,080 




Physical Therapy 


85,134 




Home Health Aide 


481,762 




Supplies 


110,452 




This total represents less than 0. 


2 percent of the total 


Medicaid 


program expenditures in the state 


for that year. With the 


exception of two governmental ager 


icies which serve large 


Medicaid 


populations, agencies interviewed 


in the New Orleans area 


reported 


that Medicaid represented between 


two and five percent of 


their 


revenues. 






The Medicaid costs cited above translate into more 


than 


40,000 units of service provided. 


More specifically, the 




following volumes of services were 


rendered to Medicaid c 


lierits: 


Skilled Nursing 


16,526 visits 


Physical Therapy 


2,612 




Home Health Aide 


15,993 




Further, 8,208 "units" of medical 


supplies were provided. 


-' 


Medicaid data specific to the entire New Orleans MSA were 


not available. However, cost data 


for Orleans Parish alone were 

CENTER FOR HEALTH F»OLICY STUDIES 



3-11 



available for FY83 (note that there are six parishes in the MSA 
with the r.a jority of the population residing in Crleans Parish) . 
Medicaid home health expenditures during the year were $630,000: 
approxir,a-ely half of the total state expenditures for home 
health. A further breakdown of costs and associated visits were 
not available. To put the Medicaid home health expenditures in 
perspective, total Medicaid expenditures for Louisiana represented 
only eight percent of Medicare home health charges in the New 
Orleans area. 

Another significant user group in New Orleans (and 
Louisiana) is the medically indigent. Medicaid eligibility rules 
in this state are extremely stringent and, thus, raany that might 
be covered by Medicaid in other states are not eligible here. All 
agencies interviewed reported that they do see medically indigent 
•patients, even though in most cases, no reimbursement is received 
for services provided to these patients. Data provided by the 
interviewed agencies and discussions with local and state 
officials indicate that the majority of the medically indigent are 
seen by state and local government sponsored home health agencies. 
Data on numbers of visits made or expenditures for services 
rendered to this group are not available. 

Agencies interviewed stated that very little home health 
service was provided to self-paying patients. Most of the private 
pay business is from those covered under private insurance, who, 
according to agency estimates, represent only betv:een two and five 



CENTER FOR HEALTH POLICY STUDIES 



3-12 



percent of their business. Officials of Blue Cross of Louisiana, 
which insures more than 40 percent of those insured in Louisiana, 
stated they have experienced little demand for home health 
services. While the benefit is included in their standard group 
package, they estimate that last year only $5,000 were expended 
for home health services to about 15 beneficiaries. 



3. 4 Market Concentration 

Data received from HCFA indicate that there were 26 
Medicare certified agencies in the New Orleans MSA as of June 30, 
1984. At the time of the market study, less than three months 
later, this number had increased tremendously. Based upon talks 
with state officials and with the Medicare intermediary, there are 
more than 40 licensed agencies currently operating in the New 
Orleans area. While no hard evidence of this increase in number 
of agencies was presented, related indications were offered. 
According to the State, in less than two months (July to 
mid-August) the number of agencies in the state grew from 111 to 
135, with a large proportion of the new agencies being in the 
New Orleans area. 

Older agencies are spawning new agencies. As described by 
several observers, often a nurse or other skilled person breaks 
off from the original agency and forms his or her own agency. The 
new agency may contract for all other services on an as-needed 



CENTER FOR HEALTH POLICY STUDIES ' 



3-13 



basis, until established. Then the process starts all over again. 
Substantial entry barriers do not exist, as both regulatory and 
capital requirements to form a new agency are minimal. 

As of June 30, 1984, there were 12 home health agencies 
v.'ithin the city of New Orleans, nine in Metairie, a major suburb 
of New Orleans, and one in Chalmette, an eastern suburb. In 
addition, three agencies operated across the Lake, and at least 
one on the Westbank. 

Agencies in New Orleans, Metairie and Chalmette all serve 
the same area, i.e., that bordered by the Mississippi River and 
Lake Pontchartrain, and extending from St. Bernard to St. John the 
Baptist Parish. Most agencies in this m.arket are local 
proprietary ones, although chains are beginning to have a presence 
here. In addition, while as of the end of June 1984, only one 
hospital-based agency was identified in the area, interviews with 
other hospitals there indicate that several are considering 
opening their own agencies. Other expansion in the market has 
been from local proprietary agencies. Agencies surveyed and 
others interviewed who were knowledgeable about the area reported 
that no single agency dominated the market. However, three 
agencies were continually mentioned as "primary competitors". All 
were relatively old, well-established, local proprietary agencies. 
No estimates were provided by the agencies on the proportion of 
the home health market that they controlled or that other agencies 
had. In fact, it appeared that agencies had little sense of the 



CENTER FOR HEALTH POLICY STUDIES 



3-14 



size of the market or market shares. The impression given was 
that there v;as enough business for everyone. 

Market share data for horr.e health agencies in the New 
Orleans metropolitan area are provided in Exhibit 3-2. A total of 
162,336 visits ($7.6 million in charges) were provided to Medicare 
beneficiaries by 14 agencies in 1983. The largest agency provided 
23 percent of Medicare visits and had 21 percent of charges. The 
five largest agencies combined, provided 78 percent of the visits 
and had 68 percent of total charges. Two years earlier, the 
largest two agencies in New Orleans (the second and third largest 
in 1983) each provided over 35 percent of total Medicare visits in 
the New Orleans area. Since then their market shares have 
diminished, primarily as a result of ccmpetition from the newer 
agencies. Several agencies indicated that they expect market 
shares of the larger proprietories to decline further as more 
hospital-based agencies open, and refer their dischanged patients 
to their own agencies. One agency reported that it recently 
experienced a 25 percent decline in vol'ome due to the opening of a 
hospital-based agency. 

Of interest is that although there is a VNA in New Orleans, 
it is not considered an active competitor by other agencies. The 
VNA has chosen to become neither Medicare nor Medicaid certified, 
and, thus, sees only self-pay and no-pay patients (i.e., medically 
indigent) . In addition, it was reported that they do serve an 



CENTER FOR HEALTH POLICY STUDIES ' 



3-15 



EXHIBIT 3-2 



MEDICARE >LARKET SHARES OF NEW ORLEANS 
HOKE HEALTH AGENCIES 
1983 



I 

TYPE OF AGENCY 


Visits 


Charges 


Nur.ber 


Percent 
of Total 


Dollars 


Percent 
of Total 


Proprietarv 


37,034 


22.8% 


$1,619,558 


21.4% 


Proprietary 


28,194 


17.4 


895,850 


11.9 


Proprietarv 


24,572 


15.1 


1,092,282 


14.5 


Proprietarv* 


19,652 


12.1 


822,527 


10.9 


Hospital-Eased 


16,306 


10.0 


741,313 


Q 


Total 5 Agencies 


125,758 


77.5 


55,171,530 


68.5 


TOTAL ALL AGENCIES (U) 


162,336 


100.0% 


$7,554,435 


100.0% 



*Not in New Orleans Proper 



Source: HCFA, unpublished data 



CENTER FOR HEALTH POLICY STUDIES 



3-1' 



area that most other agencies prefer not going into: the 

"Projects". 

Another najor market area is that across the Lake from New 
Orleans. Two smaller market areas in this area are identified by 
the cities of Covington and Slidell. The market study observed 
primarily only one of these cities. Two agencies served the area, 
one of which had split off from the other over a year ago. While 
no market share data were available, the original agency in the 
area reported no decrease in market activity in the year since the 
new agency opened. Both are local proprietary agencies, and 
provide the full range of Medicare services. Additional groups in 
the area do provide continuous care services and are not 
considered a part of the market. Neither of the two hospitals in 
the area have or are planning to open home health agencies. 

The final market in the New Orleans area is concentrated on 
the Westbank (i.e., across the Mississippi River from the city of 
New Orleans) . While the June 30 data supplied by HCFA listed only 
one local proprietary agency on the Westbank, research indicates 
that at least one other Medicare certified agency was present, a 
hospital-based agency that opened in March. In addition, it was 
reported that other hospitals on the Westbank had signed 
agreements with a New Orleans-based agency to have that agency act 
as their home health arm. Further, information provided shows 
that the recent opening of the hospital-based agency has severely 
affected the market share formerly held by the proprietary agency. 



— CENTER FOR HEALTH POLICY STUDIES 

3-17 



ma 



The scene described above is that of a dynamic, grov-ing 
rket. vrhile the number of agencies may continue to grow in the 



short tern, cne would expect considerable agency turnover, as new 
entrants replace those that will likelv fail. 



3.5 Nature of Competition - 

Agencies in New Orleans first and foremost compete for 
patient referral agents. Until recently, this competition was 
mainly for the hospital discharge planners. However, agencies in 
the area seer, to recognize that if they wanr to survive as more 
hospitals open their own agencies or joint venture with other 
groups, it is necessary for them to compete one step back in the 
referral process, namely for the physician. 

All of the agencies spoken to stated rhat they had begun to 
aggressively market for direct physician referrals. A variety of 
techniques were being used including direct ri^.ail solicitation, 
presentations at medical society mieetings, and advertising in 
professional journals. Some agencies stressed the value of 
follow-up on current patients to get physicians to recognize the 
need for and value of home health care and to specifically request 
a particular agency. Marketing of discharge planners has subsided 
considerably and is now limited to occasional phone calls and 
mailings. One hospital-based agency reported that they were 
marketing directly to the public via radio advertisements and bill 



CENTER FOR HEALTH POLICY STUDIES ' 



3-18 



boards. It was reported by several sources that son^.e agencies are 
offering inducements for additional referrals. R'OK-.ors heard 
included free trips to !:ew York and new cars being offered for 
every "X" nurrier of patients brought into the agency by nurses. 



Currently, approximately 75 percent of referrals to home 
health agencies are made directly by the hospital discharge 
planner, according to agencies interviewed. In Louisiana, 
evidence showed that while many of these referrals were from 
discharge people at acute care community hospitals, a considerable 
portion of referrals in the New Orleans area are coming from 
rehabilitation facilities. In addition to the discharge planners, 
physicians direct to hor.e health about 10 percent of the total 
patient load seen by local agencies. 

Referral sources using local agencies reported that for 
routine care, they rotated through a panel of available agencies. 
For more complicated cases, they would select an agency that they 
feel handles that diagnosis well or provides needed specialized 
services, such as IV therapy. Hospital-based agencies receive 
most of their referrals from their own discharge planners and 
attending staff. In addition, they also accept referrals from 
other sources as is indicated by public advertising campaigns. 
Several sources related that hospital-based agencies in hospitals 
with financial problems were still receiving many referrals and in 
contrast to the hospital itself, were financially healthy. 



— CENTER FOR HEALTH l>OLICY STUDIES 

3-19 



Prevision of quality services was cited by both agencies 
and referral agents as the nost important factor in attracting and 
rr.amtaining a share of the home health marke-. All agencies 
participated in at least the Medicare required quality assurance ' 
ana in-service programs. Some agencies did report going beyond 
the basics to include such mechanisms as annual mail surveys of 
pauients and physicians. 

Two other factors were mentioned by all interviewees as 
im.portant in attracting clients: timely availability and location. 
Availability includes having 24-hour on-call capability, not just 
an answering service. It also includes the promptness with which 
an agency can respond to a request for service. In one area 
visited, the discharge planner preferred thau the agencies visit 
and acquaint themselves with the patient prior to the patient's 
release to home care. Related to availability is location. There 
is a desire in the various ;:ew Orleans market areas for a hom.e 
health services provider to have a knowledge of the community and 
a local presence -here. Some discharge planners favored agencies 
which served the less desirable areas, such as the Projects and 
more distant, less populated towns. 

Other factors cited as being important in attracting 

referrals to an agency were: 



• Reliability - providing service when expected and 
on a regular basis; 



CENTER FOR HEALTH POLICY STUDIES 



3-20 



• Reputation - this includes the knowledge of referral 
sources about the agency and its strengths and the 
length of time the agency has served the area. 

Range of services did not seem to be an important factor in 
the K5V- Orleans market. This could be because all agencies 
interviewed, with the exception of the local government agency, 
provided the same set of services. Likewise, provision of 
specialty services also was not a major factor here. Few agencies 
spoke of providing "high tech" services and only one agency 
reported that it had begun to advertise itself as a specialist in 
rehabilitation. 

Agencies and others familiar with home health in Louisiana 
and New Orleans stated that price played no role in competing for 
publicly-insured (i.e.. Medicare and Medicaid) patients. Only one 
agency, which had a large continuous care side, reported that 
price of service was somewhat im.portant on the private side. 
However, the agency charged privately insured patients the same as 
it did :-:edicare and Medicaid. 



3. 6 Price Variation Among Home Health Agencies 



Primarily because of the dominance of Medicare and 
Medicaid, price competition does not exist among agencies in the 
Louisiana home health market. Maximum reimbursement rates 
(limits) by type of visit are set in advance by HCFA and 
specified, usually annually in July, in the Federal Register. 



CENTER FOR HEALTH POLICY STUDIES 



These "caps", however, do not preclude actual charges per visit 
from differing sicnif icantly . 

Exhibit 3-3 shov;s the average charges reported by visit 
type for agencies in the New Orleans area, along with averace 
Medicare cost limits of these agencies. Medicaid reimbursement 
rates are same as Medicare, for services covered b-.- Medicaid. 
Because Medicare establishes a single m.axinur allowable cost for 
each type of service which can cr.ly be adjus-ed for location and 
fiscal year (see explanation in Chapter 1) , Medicare limits across 
agencies are all about the same within a visit type (with the 
exception of hospital-based ager.ries). Exhibit 3-3 appears to 
demonstrate that charges do vary by agency type; however, because 
only two government agencies and one hcspi-al-based agency were 
available for analysis (in comparison to 11 proprietary agencies) 
these differences may be m.ore cue to small sample size than actual 
fact. Proprietary agencies' charges for all services were highly 
variable, with charges for nursing visits ranging from $35.91 to 
$100.00, physical therapy, from £35.90 to S99.95, and hom.e health 
aide services, from $20.57 to S9:-.98. The highest charges were 
m.ade consistently by the newest agencies, reflecting their 
provisional rates. 

Most agencies were operating under their Medicare cost 
limits. One exception was the state-sponsored agency. Officials 
from, state-sponsored agencies stated that their per visit costs 
often exceeded "caps" because: 1' the-- treated most of the non- 



CENTER FOR HEALTH POLICY STUDIES 

:-22 



EXHIBIT 3- 



RANHE AND WEIGHTED AVERAGE CHARGES TO' MEDICARE 
iJV TYPE OK SERVICE AND TYPE OP AGENCY 
NEW ORLEANS, 198:i 
(IN DOLLARS) 



TYPE OF 
AGENCY 


TYPE OF SERVICE 


Skilled Nursing^ 


Physical Therapy 


Home Health Aide 


TOTAL 


Range Avg. 


Range Avg. 


Range Avg. 


Range Avg, 


Government (2) 


34.13- 56.00 35.87 


N/A 


27.15-45.00 31.17 


32.81-51.20 34.86 


Hospital-Based (1) 


A6.09- 46.09 46.09 


50.10-50.10 50.10 


32.82-32.82 32.82 


41.59-41.59 41.59 


Proprietary (11) 


35.91-100.00 46.80 


35.90-99.95 45.05 


20.57-99.98 38.50 


28.43-99.92 42.37 


TOTAL (14) 


34.13-100.00 46.05 


35.90-99.95 45.55 


20.57-99.98 37.93 


28.43-99.92 42.12 


Medicare Limits 


47.68 


46.70 


34.54 




Medicaid Rates 


47.68 


46.70 


34.54 





Source: HCFA, unpublished data. 



CENTER FOR HEALTH POLICY STUDIES ' 



paying, -edically indigent population; and 2) for sore services, 
such as rejical social services ,' travel tines were great because 
cnly a fev; individuals provided these services for the entire 
state. 

Fev: agencies could provide information or insight into hew 
the costs of a visit are apportioned over major cost categories.' 
Those agencies that could provide data reported that 65 to 75 
percent of costs were labor-related, much of this in salaries. 
Few agencies, with the exception of the hospital-based and 
government based agencies, used all salaried staff. Most agencies 
employed cnly nurses and home health aides. All other services 
were provided on a contract basis, often with several agencies 
having contracts with the same person to provide services. 

Overhead was also a significant component of the per visit 
costs, accounting for about 25 percent of the total. 
Transportation, medical supplies and pharmaceuticals contributed 
the rem.aining costs. 

Agencies did comment on Medicare reimbursement levels for 
the various home health services. Despite some agencies average 
costs being far above the caps, the majority of agencies felt that 
reirPLbursement was adequate. One exception noted by freestanding 
agencies was that reimbursement for therapists (i.e., physical, 
occupational and speech) was inadequate. A shortage cf these 
personnel exists in the area. Agencies, as noted above, usuallv 



CENTER FOR HEALTH POLlCr STUDIES 



-)_ O ./I 



contract for service provision with these people. Because of the 
shortage of therapy personnel, compensation rates for total per 
visit costs, v:hich includes patient contact, travel and 
docurentaticn, often exceed the Medicare limits. 

No dual pricing of home health services was evidenced in 
the New Orleans market. Almost all agency revenue was derived 
fro- the Medicare and Medicaid programs which dictated the 
administrative and fiscal policies for all agency business. Thus, 
agencies used the same charge levels in their limited private 
market as they did in the public. 



3 . 7 Home Health Agency Use Patterns 

The distribution of home health services, provided by 
agencies in :>"ew Orleans, by type of service was shown in Exhibit 
3-1 and is expanded on in Exhibit 3-4. Services are concentrated 
in three areas: skilled nursing, physical therapy and home health 
aide. In fact, these three service groups account for almost 100 
percent of all services provided for all agencies reviewed in the 
New Orleans area. The proportion of home health aide services 
provided surpasses skilled nursing, with the exception of 
governmental agencies. Physical therapy services are also 
significant, accounting for 20 percent of all visits. This 
statistic confirms what many agencies said about the importance of 
referrals from rehabilitation facilities in their total business. 



CENTER FOR HEALTH POLICY STUDIES 



3-25 



EXHIBIT 3-4 



DISTRIBUTION OF VISITS BY TYPE OF SERVICE 
AND TYPE OF AGENCY 
1983 

NEW ORLEANS 





Ar,ENCY TYPE 


TYPE OF 
SERVICE 


Government 


Hospital- 
Based 


Proprietarv 


Skilled Nursing 


78.1% 


35.8% 


28.1% 


Physical Therapv 


N/A 


19.6 


20.3 


Speech Therapv 


N/A 


2. 2 


1.9 


Occupational Therapv 


N/A 


0.8 


1.1 


^'iedical Social Services 


< 0.1 


0.8 


O.A 


Home Health Aide 


21.9 


39.9 


48.1 


Other 


N/A 


0.9 


< 0.1 




100.0% 


100.0% 


100.0% 


Total Nunber of Visits 


3,780 


16,306 


142,250 


Total Nuriber of Agencies 


2 ' 


1 


11 



N/A - Agency does not provide this service 
Source: HCFA, unpublish data 



CENTER FOR HEALTH POLICY STUDIES 



It appears that speech and occupational therapy, and medical 
social services were seldoin provided. 

According to both agencies and referral agents, DRGs have 

had no nociceable impact on the volume of patients being seen or 

I mix of services provided. Recent changes in volume were 
I 

I attributed to the introduction of hospital-based agencies and 
I 

hospital joint ventures in the area. Agencies did, however, 

report that the patients they were seeing were, upon initial 

presentation, sicker than in the past, but this was not linked, in 

their view, to the introduction of DRGs in the hospital. 

DRGs did, however, affect activities of the referral agents 
seen. While they reported that they were not referring any more 
patients for home health, they were now required to review every 
Medicare case for possible discharge to home health. This 
obviously has implications for future home health utilization. As 
hospitals are forced to cut lengths of stays, and since everyone 
is being reviewed, more patients will become "appropriate" for 
home health services. 

An additional factor that may be responsible for increased 
home health care use are the agencies themselves. As the number 
of agencies expands and they increase their marketing activity, 
particularly to physicians who may not have referred patients for 
hom.e health care previously, use of services can expand. This has 
occurred and may continue to occur in the New Orleans area. 



CENTER FOR HEALTH POLICY STUDIES 



3-27 



3. 8 Reactions to Medicare and Medicaid 

Agencies in the Nev; Orleans area -ade numerous criticisms 
of the public payers they dealt with, many of which can be traced 
back to the statutes and their interpretation. Few comments were 
heard about payment levels for service categories, even for 
Medicaid, since it reimburses at the same level as Medicare. The 
only comjnenr consistently made about Medicaid was that eligibility 
approval under the system took too long, often not being received 
for more than 30 days after service was requested. 

Agency comir.ents appear to fall inro two broad categories: 
problems with the overall Medicare home heal-h benefit program; 
and problems chat are specific to the state and the designated 
inteinnediary . 

One source summed-up the program problems in the statement, 
"They [the federal government] are liberalizing home health care 
by statute and squeezing it by regulation." He went on to say 
that vv'ith each successive session of Congress, more people are 
brought into the home health care system, but at the same time, 
the interpretation of previous legislation restricts their ability 
to provide adequate and quality service. Agencies feel strapped 
by the "intermittent rule" and feel that it is not sufficient for 
good patient care. 



CENTER FOR HEALTH POLICY STUDIES 



3-2P 



Another issue raised by agencies was that of the claimed 
unfairness of many of the retrospective denials. Many said that 
program guidelines changed too rapidly and constantly, often being 
applied to services that were provided prior to guideline changes. 
Related to this are the technical denials (i.e., payment denials 
made by the Medicare intermediary on non-covered services which 
are not appealable by the agency) . Many thought these totally 
unfair for two reasons: 1) no appeals are permitted by the agency 
on technical denials; and 2) they are being used to invalidate the 
entire scope of treatment when a medical denial is made on one 
part of the treatment, even when the rest of the treatment can be 
shov,-n to be medically necessary. 

In addition, there was a general sense that the current 
system allows some agencies to take advantage of the program. 
First, because there are no standardized instructions or 
interpretations of the regulations, agencies, to a limited extent, 
can search for the most lenient intermediary. Since there does 
not appear to be any sharing of information about agencies among 
the intermediaries, an agency in trouble with one intermediary can 
move to another intermediary and have a "clean record". Further, 
the reimbursement system for new agencies provides great 
opportunities for "gaming" the system. Stories were told about 
one agency in the area that, when asked to settle with the 
government after two years under a high and self-beneficial 
provisional rate, declared bankruptcy and closed its doors. It 



CENTER FOR HEALTH POLICY STUDIES 



3-29 



then "oved across the street and reopened under a different 
adirinistrator , using a different internediarv . 

State-scecific problems related to problems in 
certification and payment. Agencies were upset that while the 
State certifies agencies, it did not provide them with the 
Medicare Home H^fJth Agency manual until thev attended the billing 
seminar. Since the seminar often took place up to three months 
after certification, agencies felt that receipt of the manual was 
late and precluded them from billing the intermediary from the 
start . 

Additional problems specifically identified regarding the 
intermediary have to do with payment. Many agencies claimed that 
the intermediary was very slow in paying. In addition, one agency 
complained that: benefits were often denied to them because it had 
taken too long for the agency to submit the claim (agency had a 
strictly manual billing system) . 

A final complaint about the intermediary was that it did 
not seem to have any way of checking on the status of a claim. 
Agencies reported that if they wanted to know about a claim they 
were required to re-copy the entire record in question and 
resubmit it to the intermediary. If, subsequently, another status 
check was made by the agency, they again had to copy the record 
and send it to the intermediary. The result v.'as a lot of lest 
time and high copying costs. 



3-30 



CENTER FOR HEALTH POLICr STUDIES 



3- 9 Reactions to Competitive Bidding 

Reaction to competitive bidding for home health services in 
the Nev Orleans area was less than favorable. Firstly, agencies 
had a hard tine grasping the concept of competitive bidding. HMOs 
and PPOs are non-existent in the New Orleans area. While more and 
more agencies are entering the home health market daily, home 
health agencies are not tuned into price competition or 
competitive purchasing approaches. 

On the positive side, agencies felt competitive bidding 
would reduce the number of agencies, eliminating the marginal ones 
and allowing the financially healthy ones to survive. 

Agencies and others interviewed more commonly expressed 
downside risks and fears of competitive bidding. Some felt that 
it just would not work. Consistently, it was said that the large 
existing proprietary agencies would win and that small agencies 
would be driven out of business. New agencies would be unable to 
enter the market after the first round of awards. Agencies that 
did bid would purposely underbid to get the business and then cut 
services or substitute lower skilled personnel in order to 
maintain a profit. One group responded that physicians in the 
area would never tolerate competitive bidding for home health 
services because the award would remove the physician from the 
treatrr.ent decision process. 



CENTER FOR HEALTH POLICY STUDIES 

3-31 



Finally, it was felt by some agencies that competitive 
bidding for home health services' would not succeed in Louisiana. 
Agencies expressed concern over the possiblity that awards in the 
s-.a-e v.'ould be based on graft, kickbacks and under the table 
deals, rather than on the stated evaluation criteria of the RFP . 

Should awards be made, agencies generally felt that, in the 
long run, patient care quality would drop dramatically. If the 
bid was based on price alone, incentives would not exist to 
provide the same level of services as was provided prior to 
competitive bidding. Agencies recommended that while quality 
cculd nor be assessed directly, certain factors should be 
presented and assessed to attempt to assure quality. A_-nong these 
were : 

• Length of time providing service in the area 
e Personnel qualifications 

• Agency organization 

• Critique by intermediary 

• Range of services offered 

• Ability to provide service in a timely manner. 

In addition to quality declining over time, agencies felt that 
KCFA's desired end result would not be achieved through 
competitive bidding, i.e., costs of care would not be reduced. 
Once the smaller agencies went out of business, the winnina 



3-32 



CENTER FOR HEALTH POLICY STUDIES 



agencies would feel free to raise their prices; hence, costs would 

not be reduced, only delayed. 

As to the question of whether a single agency in the area 
could assume all the Medicare and/or Medicaid home health 
business, responses were mixed. Even in agencies that responded 
positively, there was a question of why one would want to do that. 
It was felt that while there may be some benefit to the federal 
government in doing that, it would work to the detriment of the 
Industry and, rrore importantly, to the patient. 

3.10 Other Payrent Mechanisms 

Agencies in Louisiana did not complain about the current 
cost reimbursement system. However, when asked about possible 
alternatives other than competitive bidding, several options were 
suggested. Primary was some type of prospective payment system. 
Agencies expressed a preference for something simpler than the 
current system, which included incentives for profit. It was 
suggested that the unit of payment should be either per visit by 
type of personnel or per hour based on aggregate costs. 
Diagnosis-based reimbursement, such as in Medicare's DRG system, 
was not encouraged because respondents felt that such a payment 
system could not take into account differing home environments of 
the patients. 



CENTER FOR HEALTH POLICY STUDIES 

1- -^T 



Two other payment systems were presented by agency 
personnel. Under one, payment would be based on a percentage of 
the ccst cap, with caps being updated on a regular basis (i.e., a 
fee schedule approach). More dramatic is the other suggestion: 
keep ^he government out of home health: the government advocates 
a free market in which prices should be set by competitive market 
forces. The impact or Medicare and Medicaid costs of paying 
agencies whatever they charged was not addressed by the proponent 
of the "free market" plan. 

3.11 Sources of Inform.ation 

In the New Orleans, Louisiana area the following sources 
were interviewed in order to form a picture of the hom.e health 
market: 

• Staff member. Blue Cross of Louisiana 

• Staff member, Louisiana Medicaid 

• Staff r:er,bers, Medicare Intermediary (Blue Cross of 
Louisiana) 

• Assistant Director, Division of Licensing and 
Certification, Louisiana Department of Health and 
Human Resources 

• President, state home health association 

• Directors and administrators of six local 
proprietary home agencies 

• Administrators of two governmental home health 
agencies 

• Directors of one hospital-based home health agency 

• Discharge planners at four hospitals. 



CENTKR FOR HEALTH POLICY STUDIES 

T - 1 ' 



.In addition, we received costs and utilization figures from 

Medicare and Louisiana Medicaid, and cost reports for most of the 
agencies visited. We were also provided with copies of current 
and recorjT.ended revisions of state home health agency regulations. 



CENTER FOR HEALTH POLICY STUDIES 

3-35 



4. BOSTON, MASSACHUSETTS 



Prepared by: 
Christine Bishop and iMarc Cohen 



CENTER FOR HEALTH POLICY STUDIES 



4. BOSTON, IvlASSACHUSETTS 



4. 1 The Sccr.omic, Demographic and Health Care Environment 

The Boston New England County Metropolitan Area (NECMA) * 
incorporates a serr.i-circular area of 2,428 scuare riles bounced 
on one side by the Atlantic Ocean. It includes parts of Essex, 
Middleses, Norfolk and Plymouth Counties, and all cf Suffolk 
County (see map on following page) . Historical development has 
resulted in a relatively small center city (Boston proper, the 
capital city of Massachusetts) surrounded by numerous smaller 
cities and towns with various degrees of urbanization. As is 
characteristic of New England townships, these geographic divisions 
have been in place for hundreds of years, and cover the entire 
metropolitan area. This means that every portion cf -he Boston 
metropolitan area is identified as a part of a particular citv or 
town, an important fact in determining market definition for the 
traditional home health agencies, which are tovmshic-based. 

The metropolitan area is served by a network of 
circumferential and "spoke" highways, making many outlying areas 



*In New England, metropolitan statistical areas are defined in 
terms of cities and towns rather than counties. The NECMA is the 
equivalent of an MSA in that it must contain one city with 50,000 
or raore inhabitants and a total population cf 75,0 0C. 



CENTER FOR HEALTH POLICY STUDIES 



4-2 



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4-3 



accessible by car both from parts of the center city and fror. 
other suburbs. Public transportation connecting suburbs to the 
center exists in the form of commuter trains, but is not notably 
effective in linking suburbs to each other or to residential 
areas of the center city. 

The Boston NECMA is the twentieth largest metropolitan 
area in the nation, and the largest in New England. The 
population numbered 3.7 million in 1983; 12.2 percent of the 
population was 65 years of age or older, a higher proportion than 
for the United States as a whole. Employment in white collar and 
light industry takes a disproportionate share of area employment. 
Boston's numerous educational institutions are both a source of 
community pride, and major area employers. 

Boston area hospitals and medical schools have a long and 
eminent tradition. The 5 4 hospitals in the area serve the 
population with 3.7 beds per thousand population. Three major 
medical schools and their teaching hospitals carry cut research 
and professional training, and care for patients from around the 
world. In part, because of the prestige and success of the 
medical education institutions, Boston is very attractive to 
physicians, with a rate of 2.9 patient care physicians per 
thousand population, a significantly greater supply than in most 
other cities. The supply of nursing home beds is 58.9 per 1,0 00 
persons age 65 and over. 



4-4 



CENTER FOR HEALTH POLICY STUDIES 



. The political climate of the 
relatively generous support for hur. 
care for those in need. While this 
health sector, it has also led to p' 
of health sector growth and expendi' 
development on the health scene is 
maintenance organizations, both sta: 
Harvard Community Health Plan, with 
and numerous independent practice a: 



area has engendered 
an services, including health 

has encouraged growth of the 
-blic scrutiny and regulation 
-ures. A major new 
-he rapid growth of health 
:f model plans (including the 

well over 100,000 members) 
Bsociation (IPA) plans. 



4.1.1 Historical and Regulatory Environments 

Against this background, several factors that shape the 

market for home health care in Boston should be considered, 

namely the historical development of the market and regulatory 
factors influencing the market. 

Historical Development . The New England tradition of local 
philanthropy and town responsibility for local welfare, which 
dates back to the "gathering" of each town as a parish in the 
16th and 17th centuries, is embodied in the most prevalent type 
of home health agency in the region, the visiting nurses associa- 
tions (VNAs) . Each VNA sees itself as responsible for the care 
of the sick and infirm in its to\-m , and relies to a varying degree 
on local philanthropic support, as well as on third-party payments 

The strength of the VNA tradition in Massachusetts is the 



CENTER FOR HEALTH POLICY STUDIES ' 



4-! 



key both to understanding the current geographic breakdown of the 
'r.cne health ir.arket and the flow of home heal-h referrals. This 
rattern has only recently been challenged. Prior to 1981, 
':edicare regulations did not permit the certification of proprie- 
-ary agencies unless they were licensed by the states; since 
"assachusetts does not license home health agencies, proprietary 
agencies were precluded from participating in Medicare. The few 
for-profit agencies in the Boston area filled the only role open 
-o them in the Medicare hom^e health field, as subcontractors to 
non-profit providers. When Medicare certification requirements 
were changed (Omnibus Reconciliation Act of 1981) to allow 
proprietary agencies not licensed by states -o seek Medicare 
certification, a number of new and established proprietary 
agencies began to provide Medicare home health services directly. 
However, because of the prominence of the traditional VNAs, the 
proprietary agencies have yet to capture a significant share of 
the Boston home health market. 

A second challenge to VNA hegemony is now emerging from 
area hospitals. Although Massachusetts hospitals are currently 
waived from participating in the national Medicare prospective 
payment system (DRGs) , the all-payor hospital budget system 
instituted as the HCFA-waivered substitute for its prospective 
payment system (known as Chapter 372) contains at least some 
similar incentives to reduce acute hospital length of stay and to 
expand non-inpatient services. As in other areas of the country, 
this has led to an increasing interest on the part of hospitals, 



CENTER FOR HEALTH POLICY STUDIES 



4-c 



individually and through the Massachusetts Hospital Association, 
in diversifying into long-term care. A hospital home health care 
deparcnent, reimbursed by Medicare on a cost basis rather than 
under the acute-care limited budget of Chapter 372, could, in 
theory, add to hospital revenue, reduce hospital inpatient . costs 
by shortening length of stay, and have no negative effect on 
hospital inpatient revenue. In the past, the Medicare limits 
have deterred the development of hospital-based home health in 
Massachusetts. The current hospital reimbursement climate may be 
enough to overcome these barriers, and, at the least, appears to 
be fcs-ering new arrangements between hospitals and free-standing 
home health agencies. 

A third aspect of the Massachusetts environment, of less 
importance in considering the Medicare market, is the expansion 
of the definition of home care services provided by the 
Massachusetts Division of Elder Affairs (DEA) through Home Care 
Corporations (HCCs) . 

Massachusetts has been one of the most active states in 
supporting chronic community-based care for the elderly under 
Title XX; while the funding of this program has recently shifted 
to 100 percent state funds, the commitment remains strong. A 
long-standing tension exists between the homemaker and chore 
services provided by the designated HCCs in each DEA area and the 
medically-oriented skilled nursing and related services provided 
by hone health agencies under Medicare and Medicaid. Depending 



4-7 



CENTER FOR HEALTH POLICY STUDIES 



on eligibili 
clients, per 
dis£ibility a 
DEA hiis acde 
by -he KCCs; 
service and 
here health 
services, an 
they are .now 
that are act 
home-deliver- 
of Massachus 
chronic hor.e 
chrcnic-care 



-y, these organizations can serve the same elderly 
haps at different points in the course of their 
nd recovery from acute illness episodes. Recently 
i a personal attendant service that can be provided 

there is little clear distinction between this 
-he services provided by (more expensive) certified 
aides. The HCCs do not provide skilled nursing 
d are not certified for Medicare services; however, 

seen as potential competitors to home health agencies 
ive, or considering entry, in the chronic-side of 
2d disability related services. Especially because 
= tT:s' relatively extensive Medicaid coverage of 

health services, participation or exclusion fro- the 

portion of the market may affect the viability of 



so.me agencies. 

Regulatory Environment . Home health agencies need not go through 
a licensure process in order to provide home health services in 
Massachusetts. However, they must be certified as meeting 
Federal requirements and standards if they are to provide Medicare 
or Medicaid home health services. This means that those agencies 
who care exclusively for private pay patients are completely 
unregulated. For those agencies that provide care to Medicare/ 
Medicaid patients, as well as to private pay patients, the 
Division of Health Care Quality in the Massachusetts Department 
of Public Health determines compliance with the federal regula- 
tions and approves or rejects certification of agencies. 



CENTER FOR HEALTH POLICY STUDIES 



4-8 



■ To achieve certification an agency is required to submit a 

rspcrt that shows it is able to comply with the regulations. The 
Division of Health Care Quality then conducts an inspection of 
the agency, usually within one month of the agency's request for 
certification. Upon completion of the inspection, the surveyor 
sub-its a deficiency statement to the agency (when needed) and 
the agency is required to present a plan of corrections. This is 
then submitted to the Department and, depending upon the nature 
of the deficiency, certification is granted or another on-site 
visit is made with a final decision made subsequent to the 
inspection. 

4. 2 Definition of the Market; Geographic 



Agencies differed in the geographic definition of their 
markets. The VNAs consistently focused on home health patients 
within specific geographic areas generally in the township in 
which they were located, while the proprietaries identified 
patients throughout the entire metropolitan areas as their target 
population. Two of the VNAs interviewed took traditional VNA 
approaches to the market, with the goal of serving a specific 
town's home care needs. These agencies did reach out to serve 
patients in neighboring areas, but under-played this to their 
community boards and sources of philanthropy. Some VNAs have 
consolidated the activities of groups of local associations, to 
range over several towns; one of these appears to define its 
market substantially by the hospital it is associated with, which 
drav.'s patients from several nearby towns. 

" CENTER FOR HEALTH POLICY STUDIES 



4-9 



The proprietary agencies described their market as the 
en-ire Boston area. Because of their relationship with personnel 
throughout the area, and the relatively good netvrark of highways 
in the Boston area, they reported that they are able to serve 
patients in locations throughout the Boston NECMA. As competition 
increases for home health care services with the entry of 
additional proprietary and hospital-based agencies, we may see 
the VKAs increasingly compete in nearby townships and possibly 
throughout the Boston metropolitan area. 

4. 3 Definirion of the Market: Cost and Utilization 

It is extremely difficult to gather reliable statistics on 
horr.e health care utilization and cost for any market area. While 
data on Medicare expenditures and visits are collected, and 
similar information is usually available for Medicaid, information 
on private pay, privare insurance, and free care is not easily 
available. In the section below, aspects of home health care 
used by Medicare, state-funded (Medicaid and other), private, and 
indigent patients are considered. 

4.3.1 Medicare's Market Share 



As in other parts of the country. Medicare covers a 
substantial share of the home health care provided by certified 
home health agencies in the Boston area. For those agencies 
interviewed. Medicare represents from 38 to 90 percent of their 
caseload. 



CENTER FOR HEALTH POLICY STUDIES 



4-10 



On a local level, in 1983, Medicare charges for home 
health care in the Boston area totaled $35.9 million, an increase 
of 96 percent since 1981. Based on the limited information 
available en home health care expenditures by other payors for 
the Boston area, discussed below. Medicare payments represent 
about 60 to 80 percent of total home health agency revenues in 
1983. 

Medicare-certified agencies provided a total of 1,054,938 
"visits to Medicare clients in 1983. As shown in Exhibit 4-1, the 
total number of visits has been rising steadily in Boston, 
increasing by 62 percent from 1981 to 1983. At the same time, 
the mix of visits has been shifting slightly. The proportion of 
skilled nursing visits has dropped from 48.6 percent of the total 
number of visits in 1981, to 42.1 percent in 1983. Concurrently, 
home health aide services has increased by 6 percent. No real 
changes are observed in the therapy visits combined. 

4.3.2 Medicaid; A Significant Proportion of "se in Massachusetts 

The Massachusetts Medicaid Home Health Program is one of 
the largest in the country. In FY83, it was the third largest in 
terms of the number of recipients served - 20,832, and ranked 
second in expenditures - $16.7 million. Massachusetts contained 
nearly 5 percent of all Medicaid home health recipients and its 
expenditures accounted for nearly 3 percent of the total 
throughout the United States. Medicaid expenditures specifically 



4-11 



CENTER FOR HEALTH POLICY STUDIES 



EXHIBIT A-1 



>TUMEER OF VISITS BY TYPE OF SERVICE 
BY YEAR - MEDICARE 
BOSTON 



TYPE OF SERVICE 






YEAR 








1981 


1982 




1983 




Number 


Percent 
of Total 


Number 


Percent 
of Total 


Number 


Percent 

of Total 


Skilled Nursing 


317, 09A 


48.6% 


385,418 


44.3% 


444,369 


42.1% 


Physical Therapy 


75,485 


11.6 


96,646 


11.1 


120,418 


11.4 


Speech Therapv 


10,089 


1.5 


12,803 


1.5 


13,166 


1.2 


Occupational 

Therapy 


8,279 


1.3 


12,649 


1.5 


18,172 


1.7 


Medical Social 

Services 


3,621 


0.6 


7,681 


0.9 


10,278 


1.0 


Home Health Aide 


237,963 


36.5 


354,333 


40.7 


448,371 


0.1 


. Other 


231 


< 0.1 


126 


< 0.1 


164 


<0.1 


TOTAL 


652,762 


100.0% 


869,656 


IGO.0% 


1,054,938 


100.0% 



Source: HCFA, unpublished data. 



CENTER FOR HEALTH POLICY STUDIES 



4-1 



for the Boston metropolitan area cannot be identified. If 
Medicaid hc-e health care expenditures were distributed among 
areas in Massachusetts proportionately to population, FY83 
expenditures in the Boston metropolitan area would be $10.7 
million. The importance of Medicaid was also revealed in 
interviews v,'ith the agencies, which indicated that Medicaid cases 
were between seven and 4 8 percent of the caseload. On average, 
Medicaid expenditures may represent 15 to 25 percent of home 
health agency revenue. 

In addition to the traditional home health care services, 
Massachusetrs Medicaid has requested and been granted waivers to 
provide less skilled services under the "2176" Home and Community 
Services program. As of November 1, 1984, three requests had 
been approved by the Secretary of Health and Hum.an Services. The 
first waiver that was approved enabled Massachusetts to provide 
to the aged and disabled, respite care and a personal emergency 
response system. The waiver did not apply to the entire state, 
but, rather, to only two communities: Framingham and Beverly. 

A second waiver for services, to be provided statewide and 
jointly administered by the Department of Elder Affairs and 
Department of Public Welfare, was also approved for the elderly 
and disabled above the age of 60. Social services, day care, 
respite care, personal care and case management services are 
covered by the waiver. 



CENTER FOR HEALTH POLICY STUDIES 



4-13 



The third waiver, approved in May 19 84, is designed for 
the r.etally retarded. This waiver per.-.its the Department of 
Mental Heal-h to place the developmentally disabled in group 
residential hones with personal care services, transportation, 
treatment, case raanager.ent , dietary and other services. The 
waiver has been approved on a statewide basis. 

4.3.3 Other S-ate Funding of Home Care Ser vices 

Massacnusetts has been generous in funding home care 
services for che elderly disabled, working through the state's 
Department of Elder Affairs. Home care core services include 
inrormation and referral, case management, homemaker services, 
chore assistance, home delivered meals, transportation, 
companionship, and laundry services. Although these DEA home 
services are now used to complement Medicare and Medicaid skilled 
services, the twenty-rhree home care corporations created to 
provide DEA services are seen as potential competitors for home 
health agencies providing chronic homer.aker /home health aide 
care. 

These services are provided free to SSI recipients who are 
60 or above, and a means test is employed for other elders 60 and 
above. In June 1984, the number of people authorized to receive 
specific services in Massachusetts included 36,474 for homemaker 
services, 6,111 for home delivered meals, 4,527 for chore 
services, and 4 95 for laundry services. The number of people who 



CENTER FOR HEALTH POLICY STUDIES 

4-] 4 



actually received the service was approximately 10 to 15 percent 
less than the numbers of people authorized. 



4^.4 Pri 



rivate Insurance and Self Pay 

Blue Cross contracts with VNAs to provide intermittent 
skilled nursing and physical therapy to patients with basic Blue 
Cross insurance. These contracting arrangements, which began in 
1957, are now being opened to proprietary agencies. In addition, 
patients with Major Medical coverage can receive a wider array of 
home care services from VNAs meeting certain size and service 
availability and having contracts with Blue Cross (known as 
Coordinated Home Health Care contracts) . Many commercial health 
insurance companies are now also providing home health benefits. 

Health maintenance organizations are providing health 
services, including home health, to an increasing proportion of 
the Boston-area population under-65, and are expected to compete 
to enroll Medicare patients under newly promulgated HCFA 
regulations. The largest HMO in the area. Harvard Community 
Health Plan, contracts with on proprietary home health agency to 
provide covered services. A staff-model HMO recently opened by 
Blue Cross in the Boston area contracts with a group of VNAs to 
provide home health care to members. The home health services 
provided to HMO members are not yet an important part of the 
total market, but have the potential to become so with growth of 
area enrollment, especially of the Medicare-covered population. 



CENTER FOR HEALTH POLICY STUDIES 



4-15 



Thus the KMO presence in the Boston market is more important than 

::ts current market share would indicate. 

The proportion of Medicare certified agency revenue 
derived from self pay patients and those with private insurance 
is unknown. However, several agencies reported that their 
private pay business represented 12 to 15 percent of their total 
business. 

4.3.5 Uncovered Care 



Some home health care patients are not eligible for 
covered care under public program.s or private insurance, while 
others exhaust their coverage or lose their covered status. The 
treatment of patients who lose their coverage under Medicare or 
Medicaid differs by agency type. Proprietary agencies reported 
zhat they try to transfer patients to the private side of their 
business. If these patients cannot afford to pay themselves, 
they are either referred back to the original referral source or 
■zo charirable organizations or churches. In some cases, they are 
referred to VNAs. 



The VNAs interviewed reported that they offer care on a 
sliding fee schedule or on a no-pay basis to patients not covered 
by any insurance or public program. However, VNAs stated that 
delivery of free and partial-pay care has become increasingly 



fficuH 



in the absence of specifically designated philanthropi 



ic 



CENTER FOR HEALTH POLICY STUDIES 



4-16 



funds.. This is because Medicare and Medicaid reimbursement, based 
on average per visit costs, prevents shifting of the cost of free 
care onto these payors. Only one agency, backed by a specific 
local charity group, reported significant free care. Others 
reported partial-pay patients as private-pay. Limited informa- 
tion, drawn from agency annual reports, reveals the extent of 
subsidization of private pay patient's costs by local philan- 
thropy. The value of free care for agencies for which data were 
available varied from 3 to 8 percent of total agency revenue. 
Much of this care is paid for by the United Way. 

None of the proprietary agencies interviewed offered care 
on a sliding-fee basis, but one had an arrangement with a hospital- 
based charitable fund that again indicates that free care can be 
delivered if it is specifically and directly supported. The 
agency contracted to care for non-paying patients referred by the 
hospital, and agency charges were paid by the charitable trust. 

4 . 4 Market Concentration 

According to the HCFA listing of Medicare providers, there 
were 60 home health agencies certified to provide Medicare 
services in the Boston metropolitan area as of June 30, 1984. Of 
those agencies, 30 were visiting nurses associations, five were 
other voluntary agencies, eight were hospital-based agencies, ten 
were proprietary agencies, three were private non-profit 
agencies, and four were local government agencies. 



CENTER FOR HEALTH POLICY STUDIES 



4-17 



These agencies compete for patients in differently defined 
markets, so that their estimates of the proportion of the 
patients they serve in their own self-defined market must be used 
with care. First, it is important to recognize that agencies do 
net actively seek cut Medicaid and partial-pay patients, whose 
care costs more than the revenue it generates. Proprietary 
agencies serve few no-pay or low-pay patients, and some do not 
participate in Medicaid. 

In all cases, the local VNA appeared to be the dominant 
provider in each town, with market shares estimated as high as 95 
percent. Several of the VNAs in townships in the Boston suburbs 
that die not merge with other nearby VNAs were losing market 
shares to near-by consolidated VNAs, products of mergers, and 
possibly also to proprietary and hospital-based agencies. Market 
share data for the entire Boston metropolitan area are shown in 
Exhibit 4-2. The five largest agencies in terms of visits and 
charges were all VNAs. These five agencies made up 44 percent of 
all Medicare visits in the Boston NECM_A in 1983, and 4 8 percent 
of the charges. 

As the number of agencies has increased, the VNAs hold on 
the market has begun to slip. Between 1981 and 19 83, the VNA 
share of Medicare payments declined from 8 4 to 81 percent, while 
the share of proprietary and private nonprofit agencies increased 
from 0.5 percent to 3 . 8 percent. During this two year period, 
hospital-based agencies increased their share of Medicare revenues 



CENTER FOR HEALTH POLICY STUDIES 



4-lC 



BOSTON 

MEDICARE MARKET SHARES OF BOSTON 

HOME HEALTH AGENCIES 

1983 



EXHIBIT k-l 





Visits 


Char 


ges 


TYPE OF AGENCY 


Numb e r 


Percent 
of Total 


Dollars 


Percent 
of Total 


WA 


239,145 


22.7% 


$ 9,946,251 


27.7% 


■ \^;a 


72,087 


6.8 


2,321,582 


6.5 


TOA 


53,283 


5.1 


1,761,313 


4.9 


V iiA 


52,515 


5.0 


1,558,782 


4.3 


TOA 


50,097 


4.7 


1,549,116 


4.3 


TOTAL 5 AGENCIES 


467,127 


44.3 


17,137,044 


47.8 


TOTAL ALL AGENCIES 


1,054,938 


100.0% 


$35,869,507 


100.0% 



Source: HCFA, unpublished data 



4-19 



CENTER FOR HEALTH POLICY STUDIES 



from 8.4 to 9.4 percent. The Medicare market share for other 

vcluntc^ry and government agencies remained stable at 6.7 percent 
over the period. 

4. 5 Nature of Competition 

Interviews with agencies revealed that hc:^,e health agencies 
compete intensely for control of patient flow. This does not 
occur arcund price or cost of care. What might be called "pro- 
fessional working relationships" appear to be most important in 
determining which agencies receive referrals. 

Hcne health agencies attempting to serve Medicare patients 
must reach one of two key decision makers over hom,e health 
consumption decisions: the hospital discharge planner or the 
physician. The typical VNA interviewed received about 75 percent 
of its admissions through discharge planners, often from one 
nearby hcspital with which the VNA had a long-established working 
relationship. VJhile the proprietaries also gain referrals from 
discharge planners, several had much greater patient flows 
directly from physicians. Direct referral from patients and 
their fam.ilies was not common. 

In seeking referrals from discharge planners and 
physicians, agencies do not compete on the basis of price or 
cost. Ins-ead, both agencies and hospital discharge planners 
cited response time, quality of care, follow-up •.■rith referral 



CENTER FOR HEALTH POLICY STUDIES 



4-: 



sources, and long-standing working relationships as factors in 

gaining referrals. 

Discharge planners reported that ease of referral was, in 
many cases, the most important issue in selecting an agency: Was 
the agency easy to reach, available to serve the patient when 
needed, with the services he or she required? Location of the 
patient was an important determinant of ease of referral in some 
cases, with discharge planners assigning patients to nearby VNAs 
based on the patient's home address. If patients have 
preferences about which agency should serve them, the discharge 
planner atteir.pts to honor these, but this would usually occur 
only in the case of a patient with a previous home health care 
episode or a patient with ties through religious affiliation or 
community location to a religious or community based agency. If 
the patient will be directly paying for some non-Medicare 
services, to discharge planners reported that, they are more 
likely be referred to a proprietary agency which is able to 
coordinate homemaker services on its so-called "private side" 
with the skilled services provided under Medicare. 

The Boston market has long been the province of the VNAs, 
and the working relationships between hospital discharge planners 
and local VNAs are so well-established that new agencies 
expressed frustration as they described their attempts to break 
into the hospital discharge referral flow. Anti-trust suits have 
been mentioned by the new agencies, as they describe the hospital 



CENTER FOR HEALTH POLICY STUDIES 



4-21 



discharge market as "locked up" by the WAs . Yet in the new 
climate, the lonc-standing "gentleman's agreements" that 
protected the local \n^A market boundaries are breaking down, and 
some VNAs now seek expansion in areas cnce seen as belonging to 
sister VNAs. 



Strategies used to reach discharge planners include: 



o written materials describing new services, 
expansion of services; 

• meetings with discharge planners at the hospital; 

• close liaison relationships between agency and 
hospital, e.g. where agency is located on hospital 
grounds, shares personnel with discharge planning 
department, or supplies a liaison person to 
coordinate discharges; 

• yearly luncheon; 

• educational program on aspects of discharge 
planning; and 

• courier service to pick up written referrals on 

discharged patients. 

In one case, a discharge planner described a proprietary agency 
promising free care to needy uninsured discharged patients if the 
discharge planner would refer Medicare patients as well. 



Other agencies pursued new working arrangements with 
referral institutions. Examples of this are presented below: 



One VNA had an interlocking subcontract arrangement 
with the hospital home care department. The VNA 
received referrals of patients requiring skilled 



CENTER FOR HEALTH POLICY STUDIES 



4-: 



nursing, non-intensive physical therapy and home 
health aide visits; if the patient became sicker 
and required mere intensive services available from 
the hospital hcr.e care unit (IV therapy, physical, 
occupational, speech therapy), he or she was 
transferred bac!-: -o the hospital-based agency for 
administrative re rrdination. 

• In several instanees, agencies had recently, or 
were about to, become sister corporations with the 
hospital under ar. umbrella hospital board. Such an 
arrangement means that they are not strictly 
hospital-based agencies, but they are very closely 
tied to the hospi-al. 

Some competition for referrals is taking place outside the 

traditional referral route. A new Blue Cross-sponsored closed 

panel health maintenance organization in the Boston area. Medical 

East, has contracted with a consortium of VNAs to provide home 

health services under its comprehensive capitated package. Known 

as the VNA Coalition, it is a group of approximately 25 VNAs with 

a single contract with the HMO. A steering committee made up of 

_ representatives from eight of the agencies directs ■ the group. 

Referrals are made through three central intake points and are 

assigned to a particular agency based on location. The Harvard 

Community Health Plan has contracted with a single proprietary 

agency to serve its members wher. they need home health care. 

Further, proprietary agencies are seeking business from 

self-insured local companies. The agencies are seeking to 

persuade the firms that they can save on workman's compensation 

if they provide effective home health care to their work force. 



CENTER FOR HEALTH POLICY STUDIES 



J 



4-2 3 



4. 6 Price Variation Among Home Health Agencies 

Medicare, Medicaid, and other payors nay pay different 
prices for care to the same agency. Each cf these prices is 
discussed in turn below. 

4.6.1 Variation in the Price Paid by Medicare 

Although price does not affect competition among agencies 
for the Medicare home health patient, there is variation among 
Medicare-participant agencies in their costs, and thus in the 
charges made ro Medicare. Exhibit 4-3 shows charges per visit by 
the various types of agencies. This table indicates that charges 
by VNAs, other voluntary agencies and the private non-profits are 
close to one another for nursing and physical therapy services. 
Some disparity is, however, noticed in charges among these 
agencies for home health aide services. Charges by proprietaries 
and hospital-based agencies are similar in all categories and are 
considerably higher than other types of agencies. The higher 
charges by proprietary agencies may, however, be only temporary - 
a reflection of large start up costs (none of the proprietary 
agencies was in existence before late 1981) . 

The effect of these different charges on the price that 
Medicare actually pays may be somewhat limited because Medicare 
payment may not exceed pre-determined cost limits. Information 
provided by rhe agencies indicated that two out of the three 



CEMTER FOR HEALTH POLICY STUDIES 



4-24 



RANGE AND WEIGHTED AVERAGE CHARGES TO MEDICARE BY 
TYPE OF SERVICE AND TYPE OF AGENCY 
BOSTON, 1983 
(IN DOLLARS) 



EXHIBIT />~3 



Type of 
Agency 


TYPE OF SERVICE 


Skilled Nurs 


ing 


Physical Therapy 


Home Health 


Aide 


TOTAL 


Range 


Avg. 


Range 


Avg. 


Range 


Avg. 


Range 


Avg. 


VNA (26) 


24.39-44.93 


35.08 


20.58-44.97 


33.74 


13.74-42.43 


29.96 


21.10-40.01 


32.86 


Other Voluntary (4) 


29.98-37.24 


32.73 


29.98-36.84 


32.11 


15.53-30.16 


25.53 


25.04-32.08 


29.42 


Government (2) 


24.99-27.00 


25.68 


28.97-29.95 


29.68 


10.05-20.96 


19.29 


21.06-22.88 


22.46 


Hospital-Based (7) 


35.20-91.25 


47.43 


32.58-93.25 


46.36 


25.84-53.02 


35.36 


34.90-67.16 


42.98 


Proprietary (6) 


44.00-66.99 


51.85 


38.00-66.00 


43.44 


28.35-67.91 


38.50 


35.74-67.49 


43.27 


Private 
Non-Profit (3) 


27.97-40.04 


35.45 


31.34-50.00 


32.26 


16.87-26.30 


19.49 


23.31-33.17 


26.03 


TOTAL (48) 


24.39-91.25 


35.85 


20.58-93.25 


35.19 


10.05-67.91 


29.68 


21.06-67.49 


33.27 


Medicare Limits 


54/65* 


52/59* 


41/57* 






Medicaid Rates 


30 


25 


11 





*lncludes hospital add-on 



Source: HCFA, unpublished data 



CENTER FOR HEALTH POLICY STUDIES 



proprietaries exceeded the caps for all of the service categories 
and the thir-: exceeded them for home health aide and speech and 
physical th-r-ry. The VNAs all had average per visit costs well 
belcv; the allzvable Medicare limits. The tendency of agencies to 
keep their ::5-3 below Medicare limits may relate to the low 
Medicaid maxi.-.un rates (differences between costs and Medicaid 
paym.ents do r : r affect Medicare rates). 

The T-er visit cost computed from available cost reports 
can be broker. cDwn into major categories including, labor, 
transportat_c.- and overhead. In general, labor expenses 
comprised over -wo-thirds (69 percent) of per visit costs among 
VNAs, whereas fcr proprietaries, labor accounted for only half of 
the cost. :.-. addition to the expense incurred while spending 
time with a rstient, labor costs include travel time, time needed 
for documenta-ion of the visit, and time spent in following up 
with the paiier.-'s family, physician, and discharge planner. For 
the proprie-aries, nearly half of the per visit cost could be 
attributed -.: overhead; for most VNA's overhead account for only 
a quarter of -.he per visit costs. For all agencies, 
transportatic- expenses comprised less than 10 percent of the 
average cost per visit. Medical supplies, pharmaceuticals, and 
general and af-.inistrative costs were considered minor 
contributors zo the entire cost of a visit. 

It is i-.-eresting to note that two prominent agency types 
studied in E::-:n, the proprietary and the \':;a, have different 



CENTER FOR HEALTH POLICY STUDIES 



4-26 



styles of controlling, monitoring, and paying their service 
delivery personnel. The proprietary agencies operated in a 
temporary-help agency style, with the central office contracting 
with individual health personnel from a roster as referrals come 
in. Agencies reported that most of their contact with personnel 
could be effectively handled by telephone and mail: nurses 
received information on patients by telephone, could send changes 
in doctor's orders to the physician for signature, and could mail 
in both weekly hours and case documentation. Supervisors 
coordinated patient services in the field, but might not come 
into face-to-face contact with the providers when they visited 
patients' homes. One agency, not fully satisfied with this 
arms-length relationship with staff, was instituting informal 
Friday afternoon office-hours, where case coordinators and other 
administrators would be in the office. 

Working from rosters of licensed nurses and home health 
aides who are interested in providing home health care on an 
as-needed basis, the proprietary agencies are able to meet 
changing demands for care in a flexible manner: few, if any, care 
providers are paid on a salaried basis, or even guaranteed a 
minimum number of hours per week. After a training and 
observation period when more steady availability is required, 
workers can typically choose their own hours of availability from 
week to week. 



CENTER FOR HEALTH POLICY STUDIES 



4-27 



The VNAs described a different service deliverv style. 
Most professional nurses were paid on a salary basis. Many 
agencies reported that significant numbers of their aides were 
"benefitted" as opposed to being paid as contractors without 
social security and health insurance. Some paid aides on a 
salary basis. The \^JAs typically expected their nurses to report 
to the central office each morning to receive, in writing, 
information on new and ongoing cases. The nurses returned 
to the office to consult with other staff, allowing face-to-face 
coordination of various services provided to individual patients 
and supervision. Paperwork was completed in the office. 

Much of the difference between VNA and proprietary agency 
practices regarding using salaried or contract personnel to 
provide services may relate to the nature of business. In 1983, 
the VNAs had average Medicare revenue of over $1 million, while 
average revenue for proprietaries was about one tenth as 
large. It may not be administratively and fiscally feasible to 
emiploy full tim.e nursing staff with a variable case load and with 
annual revenues of less than $200,000. In the other market study 
sites, the staffing and contracting experience of VNAs and 
proprietaries tended to be similar. 

4.6.2 Price to Medicaid; Determination and Variation 

Care provided to Medicaid patients is reimbursed at 
prospective per-visit rates determined by the Massachusetts Rate 



CENTER FOR HEALTH POLICY STUDIES 



4-28 



Setting Commission. While the rates are based on cost, they 
entail two provisions which make them significantly lower than 
cost, only about 50 percent of Medicare limits, for most proprie- 
tary agencies. First, nursing costs are assessed for 
allowability using a productivity standard of 5.2 visits per day 
per full-time equivalent; an incentive payment allows for sharing 
the cost-savings of productivity gains above 6,03 visits per day 
per FTE. Second, overhead costs cannot exceed 37.5 percent of 
total reimbursable costs, net of transportation. The 
rate-setting method helps to explain why proprietaries serve very 
few Medicaid patients. In addition, the rate setting procedures 
may help to explain why VNAs tend to keep costs well below the 
Medicare limits: while Medicare costs would be reimbursed up to 
the limits, this would not be true for Medicaid, and the amount 
of uncovered expense would increase. 

4. 7 Home Health Agency Use Patterns 

As in other parts of the country, the patients cared for 
by Boston-area certified home health agencies most commonly make 
use of skilled nursing and home health aide services. As was 
shown in Exhibit 4-1, physical therapy visits are also provided 
in significant amounts by the agencies. 

Little information is available on case mix for area home 
health agencies. With respect to age, proprietary agencies 
reported that close to 100 percent of their caseload was 65 years 



CENTER FOR HEALTH POLICY STUDIES 



4-29 



of age or older, not surprising since they serve mostly 
Medicare clients. The two largest VNAs were able to supply 
adrissions statistics by diagnosis. These data showed that the 
r.ost frequent diagnoses were those associated with old age, 
namely diseases of the circulatory system, malignancies and 
injuries. Agencies have not observed striking changes in case 
mix due to the Massachusetts hospital budget control measure, 
Chapter 372. Like PPS, this all-payor reimbursement system is 
designed to contain hospital costs, but does not specifically 
target Medicare length of stay for reductions. 

A question in considering the competitive bidding options 
is whether one or several bidding entities could serve the entire 
area. As the market analysis has shown, the Boston area has many 
sub-markets, and is large geographically and in number of visits. 
Yet the mode of operation of the proprietary agencies, with staff 
paid on a per visit basis and located throughout the area, 
already allows them to serve patients throughout the area and to 
expand to meet dem>and. Geographic coverage accounts, in part, 
for their contracts with the area-wide insurers, since the 
alternative would have been for the insurer-entities to contract 
with numerous individuals VNAs. The VNA Coalition, the group of 
25 \'t;As described earlier, is a direct response to this capacity 
of the proprietaries to cover a broad geographic area. Referrals 
are to be handled at a central location, and patients are to be 
assigned to local VNAs based on patient's residence rather than 
hospit&I of discharge. This would allow for centralized control 



CENTER FOR HEALTH POLICY STUDIES 



4-30 



of utilization and localized control of quality of care and 

service delivery. 



4 . 8 Reactions to Medicare and Medicaid 

Most agencies interviewed were dissatisfied with certain 
aspects of the Medicare/Medicaid programs. The problems can be 

classified in the following way: 

a. Policy problems 

b. Administrative difficulties 

c. Finance-related issues. 

More than half of all agencies reporting indicated that 
the paperwork and documentation required by Medicare/Medicaid was 
excessive. To highlight the problem, one VNA provided figures 
showing the amount of time nurses spent in the office on 
administrative matters. While a nurse might spend 43 percent of 
her time in a patient's home, more than 45 percent of her time 
was spent in the office documenting care delivery. 

Documentation was given added impetus because of a new 
method for computing agency eligibility for waiver of liability 
under Medicare being used by the interm.ediary in Massachusetts 
during the last half of 1984. Prior to this time, agencies under 
this waiver were assumed to act in good faith in delivering care. 



CENTER FOR HEALTH POLICY STUDIES 



4-31 



so that when claims were denied upon review, care already 
delivered was still reimbursed by Medicare. Until the summ.er of 
1984, Blue Cross of Massachusetts granted waivers to agencies 
v/hcse denied visits were less than 4 percent of total visits. 
The new standard used was that denied visits must be less than 4 
percent of the visits reviewed . Because of this change in 
determination, more than half of the certified home health 
agencies have lost their waiver of liability. Every case cared 
for by non-waivered agencies had to be reviewed, rather than just 
a sample, and the cost of denied visits was not reimbursed by 
Medicare. Agencies still under waiver reported that their 
concern about losing their waiver had made rhem much m.ore 
hesitant to admit patients whose eligibility for coverage was not 
clear cut, and had increased the time spent on documenting 
eligibility. Agencies who lost their waivers had the added 
concern that denied claims would not be paid. An agency's waiver 
could be reinstated or denied on a month to m.onth basis. 
Agencies reported that ongoing concern about coverage had reduced 
Medicare case loads significantly, and had increased Medicaid and 
partial-pay patients. Total caseloads appeared to' decline in 
response to this regulatory action. It is expected that since 
this method of waiver determination stopped being used (effective 
January 1985) agency patient loads should return to normal. 

Payment delays, as well as inconsistent and arbitrary 
regulations, were mentioned by half of the respondents as 
additional problems. These problems cause financial strains for 



CENTER FOR HEALTH POLICY STUDIES 



4-32 



those agencies that cannot finance cash flow during a waiting 
period. Finally, half of the respondents indicated that Medicaid 
reiriursement was too low. The proprietaries claimed that 
re in±)ur semen t under both Medicare and Medicaid was too low. 

4 . 9 Reactions to Competitive Bidding 

Reactions among agencies to competitive bidding for home 
healrh care in the Boston area were mixed. Proprietary agencies 
tended to be especially favorable to a new selection mechanism 
which they viewed as potentially ending the VNA hold on the 
Medicare market. Although proprietary agencies' Medicare charges 
are higher than VNA charges, they did not appear concerned that 
this would put them at a disadvantage in competing for Medicare 
business under new rules. VNAs tend to have concerns about 
quality and long run costs , but not all VNAs were opposed to the 
concept of competitive bidding. 

Almost all respondents said the number of firms in the 
market would decline. However, there was some degree of 
variation in interpreting the likely impact of such a reduction. 
A number of VNAs and one proprietary agency believed that the 
system would reduce competition and lead to a monopoly or 
oligopoly. One VNA director felt that after the system was in 
place for a few years, collusion among firms would result in 
higher prices. Another director felt that consumers would suffer 
because they would be more limited in their choice. 



CENTER FOR HEALTH POLICY STUDIES ' 



4-33 



A second view offered by a number of respondents was that 
a reduction in the number of firms would leave remaining firm.s 
with larger volumes. Respondents indicated that average costs 
v.'ould decline as volume increases. Thus, these respondents felt 
that a reduction in the number of firms would lead ro efficiency 
gains in the market. 

While more than half of those responding felt that costs 
would ultimately decline, two VNAs , as well as one proprietary 
agency, believed they would increase. The director of one VNA 
thought that although prices may initially fall, the requirements 
for stringent quality assurance programs would greatly increase 
administrative expenses. Another VNA director argued that as the 
number of firms declined, the incentive for cost cutting would be 
diminished, and, hence, overall costs in the long run would 
increase. Finally, the director of a proprietary agency felt 
that while costs billed to Medicare/Medicaid may actually fall, 
savings to the system would not be realized. More specifically, 
he claimed that quality of care under a comipetitive bidding 
system will decline, and, therefore, people who might otherwise 
have stayed out of hospitals will be forced back into them. 

The prediction that quality would decline under a contrac- 
tual bidding arrangement, heard from both VlCAs and proprietaries, 
is somewhat puzzling in light of agencies' general willingness to 
proceed with contractual arrangements with insurers. Proprietary 
agencies expressed the belief that Medicare is adequately 



CENTER FOR HEALTH POLICY STUDIES 



4-34 



assessing quality through its record audits, and there is no 
reasor. that this should not continue. Some VNAs expressed 
specific concerns about whether Medicare has access to the 
appropriate information to assess quality of care, either for 
currer.t quality control or to select and monitor winning bidders 
in a co~Lpetitive bidding situation. 

Who one expects to win bids under a competitive bidding 
syster. depends on who is asked. VNAs expect proprietary firms to 
win contracts, whereas proprietaries think the VNAs will win. 
Proprietaries claim that the VI^IAs will win because of their 
traditional relationships with hospital discharge planners, their 
high volume which would enable them to submit low bids, and the 
widespread acceptance of VNAs in local communities. VNAs fear 
that proprietaries will win contracts because of their experience 
in marketing and competing, their ability to charge different 
prices for private and Medicare patients, and their advantage in 
finance, many times as part of larger corporations. 

As noted above, agencies expressed concern that quality of 
care for Medicare patients could or would decline under a 
contractual competitive bidding process. They offered few 
suggestions about improving quality monitoring, either currently 
or under a competitive bidding arrangement. Four agencies 
recomiTiended that patients be visited and interviewed by 
assessrp.ent staff to determine quality. Others cited the need for 
clearer quality standards as well as measurement instruments. 



CENTER FOR HEALTH POLICY STUDIES 



4-35 



Two agencies felt that a focus on investment in training of staff 
vould be a good method for helping to ensure high quality care. 
:n-.plicit:y, agencies sav; the injection of price competition into 
the ho-e health market as introducing incentives to reduce 
service incuts. 



4.10 Sources of Informati 



on 



Information was gathered on the Boston home health market 
from a variety of sources. Most important were interviews with 
agencies and discharge planners. Specifically we talked with: 

• Directors of six Visiting Nurses Associations 

• Directors of four proprietary home health agencies 
« Director of one hospital-based home health agency. 

• Discharge planners at five hospitals. 

In addition, the representatives of the following agencies 
and organizations were interviewed: 

• Massachusetts Association of Community Health 
Agencies 

• Massachusetts Blue Cross (intermediary) 

• Assistant Director, Massachusetts Rate Setting 
Commission 

• Staff Member, Massachusetts Department of Public 
Welfare (Medicaid) 

• Assistant Director, Massachusetts Department of 
Public Health (certification agency) . 



CENTER FOR HEALTH POLICY STUDIES 



4-36 



5. CONCLUSIONS AND IMPLICATIONS 
FOR COMPETITIVE BIDDING 



CENTER FOn HEALTH POLICY STUDIES 



5. CONCLUSIONS A!" IMPLICATIONS FOR COMPETITIVE BIDDING 



introduction 



Tr.e purpose cr - 
health care industry is 
industrial structure, h- 
characteristics of the .-. 
assist ir. not only asses 
ccn^.petitive bidding s-r = 
systems zhat are most c: 
characteristics and rr.os- 
Kecicaid objectives for 
section we summarize rhe 
study. This is follower 
for competitive bidding. 



■'is limited market study of the home 

-.0 develop an understanding of its 

v- agencies compete, and other important 

c~e health care market. This should 

sing the feasibility and attractiveness of 

-egies, but also in designing alternative 

-patible with home health market 

likely to achieve Medicare and/or 
home health care procurement. In this 
primary conclusions of the miarket 
-y a review of the study's im;plications 



5.2 Prim:ary Study Findj-g; and Conclusions 



Ho~e Health Care Services - Product Definition, 



Home health care 
patients in their homes, 
conditions. This broad : 
care services, homemaker 
and other products and s- 
individuals. For the c; 



— ight be defined as care provided by 
required because of adverse health 
efinition could include skilled health 
lype services, durable medical equipment, 
rvices provided to home-bound 
7- OSes of this study, a narrower 



CENTER FOR HEALTH POLICY STUDIES 



J 



5-2 



definition is used. Home health care is defined as those 
services covered under the Medicare program: 



• part-time or intermittent nursing care provided by 
or under the supervision of a registered 
professional nurse; 

e physical, occupational, and speech therapy; 

• medical social services under the direction of a 
physician; and 

• home health aide services primarily provided to 
assist with the patient's personal care, under the 
supervision of a registered nurse. 

VJhile medical appliances and supplies are also covered under 

Medicare, because of differences in providers and in the nature 

of the products, these were not considered as home health care 

services for purposes of this study. 



Size and Growth Trends in Home Health Care . 

Home health care services represent a small but rapidly 
grov'ing share of total health expenditures. KCFA does not 
publish expenditures data separately for home health care. 
Predicasts, Inc., a market research firm, estimates that in 1983, 
expenditures for "primary home health care services" were $2.6 
billion, or slightly less than 1 percent of personal health care 
expenditures. However, while relatively small, home health care 
is growing more rapidly than any other major component of health 
care expenditures. Between 1979 and 1982, Medicare payments for 
home health care increased from $520 million to $1,091 million. 



CENTER FOR HEALTH POLICY STUDIES ' 



5-3 



an increase of 110 percent over the three year period. Medicaid 
home health expenditures increased from $263 million to $496 
million, a rise of 89 percent. Medicare and Medicaid 1983 home 
health expenditures are estimated to be $1.5 billion and $600 
million, respectively. We estimate that Medicare expenditures 
represent 60 to 70 percent of total home health expenditures, 
while Medicaid expenditures represent an additional 20 to 25 
percent. Private insurance and consumer out-of-pocket payments 
represent about 10 to 20 percent of home health expenditures. 

The primary factors responsible for growth in home health 

expenditures are: 



• changes in Medicare legislation which relaxed home 
health care entry requirements; 

• a growing proportion of the population that is 65 
and over, and especially the population that is 75 
and over — the demographic croup that represents 
the largest users of home health services'; 

• increased preference of home health services as 

opposed to inpatient hospital and nursing hone 
care. 

The last two of these factors are expected to continue in 

importance over the next decade. The preference for home health 

care services will be abetted by pressures under Medicare DRG and 

other admission-based payment systems, which provide incentives 

for early hospital discharge. An additional factor is marketing 

activities directed toward physicians and consumers by the 

increasing number of home health agencies. 



CENTER FOR HEALTH POLICY STUDIES 



5-4 



Some measures of home health care growth are: 

o growth in Medicare heme health visits: 7,654,000 
in 1974, to 29,006,000 in 1982; 

• growth in number of Medicare-certified agencies: 
2,212 in 1972, to 3,689 in 1982, to 5,274 in 1984. 

• growth in number of Medicare home health users and 
users per 1,000 beneficiaries: 392,700 in 1974 to 
1,171,700 in 1982, and 16.5 per 1,000 beneficiaries 
in 1974 to 39.7 in 1982. 

The substitution of home health care for inpatient 

hospital and nursing home care has become a policy objective of 

Medicare, Medicaid (rationale for "2176 Waiver" program) and 

increasingly for private health insurers, as well. Home health 

expenditures are expected to continue growing more rapidly than 

other health care services, although possibly by less than the 30 

percent annual rate of growth observed between 1974 and 1982. 

Recent growth in home health visits at each of the three 
market study sites has been substantial. As shown in Exhibit 
5-i, the increase in number of visits between 1981 and 1983 was 
129 percent in Sacramento/Stockton, 10 9 percent in New Orleans 
and 6 2 percent in Boston. Each of the visit types experienced 
large increases, although percentage increases were greater for 
occupational therapy and medical social services, two of the less 
frequently used services. Home health visits per person age 65 
and over* residing in the metropolitan area doubled in Sacramento/ 



*The number of persons age 65 and over was estimated by increasing 
1980 Census statistics for each metropolitan area by estimated 
national rates of increase for this age group. 



CENTER FOR HEALTH POLICY STUDIES 



5-5 



Stoc) 


:ton and in New Or 


leans over the two year period. In Boston, 


V'hl G ^ ^ 


: the initial rate 


of usuage had been h 


igher, it 


. increased by 


abcu- 


. half betv/een 19 6 


1 and 1983. 








The cistributi 


on of visits by type 


of servic 


es is also 


shov.T 


in Exhibit 5-1. 


At each of the marke 


t study s 


ites, skilled 


nursi 


ng and home healt 


h aide were the most 


common t\ 


pes of 


visits, accounting for 


75-85 percent of all 


visits , 


although the 


relat 


ive magnitude bet 


rt'een the two differed 


among the sites. 


Physi 


cal therapy, the 


third miost com.mon typ 


e of service, varied 


frc- 


11 percent of all 


visits in Boston to 


20 percen 


t in New 


Orlea 


ns. No other typ 


e of visit accounted 


for more 


than 3 


perce 


nt of visits at a 


-ly of the sites. 






Home 


Health Care Marke 


t: Geographic Definit 


ion. 






The market for 


home health care is 


typically 


a city, its 


surrounding suburbs, and nearby less popula 


ted areas 


The market 


is ce 


fined this way fc: 


r several reasons. M 


edicare r 


eccgnizes a 


provi 


der's service area as being a fifty mi 


le radius 


around the 


provi 


der. Also, additional costs (related 


to travel 


time) and 


admin 


ist rat ive /quality 


assurance requirements make serving areas 


more 


than one to 1-1/2 


hours travel time impractical 


Finally, 


hospi 


tal discharge planners prefer agencies 


with a 1 


ocal presence 


and k 


nowledge of the local community. 

CENTER FOR HEALTH POLICY STUDIES 



5-6 



CROvrrn in iiomi: iif.ai.tii visits at tmk imrkk 

MARKET STUDY SITES. 1981-1983 



KXlllllIT 5-1 



TYPE OF SERVICE 


SACRAMENTO/STOCKTON 


NEW 


ORI,F.ANS 


BOSTON 


Percent Change Percent of Total 
1981-83 Services, 1983 


Percent Change 
1981-83 


Percent of Total 
Services, 1983 


Percent Change Percent of Total 
1981-83 Services, 1983 


Skilled Nursing 


1141 45.lt 


118Z 


30. OT 


402 


42. IZ 


Physlcnl Tlmrnpy 


\T< 12.6 


IK) 


19. fl 


Ml 


11.4 


Speech Therapy 


72 2.3 


111 


1.9 


JO 


1.2 


Occupational 
Therapy 


146 2.9 


1,186 


1.0 


119 


1.7 


Medical Social 
Services 


371 1.6 


486 


0.5 


184 


1.0 


Home Health 
Aide 


134 35.5 


97 


46.7 


88 


42.5 


All Services 


1291 100. OZ 


109Z 


100.01 


62X 


100. OZ 


NUMBER OF VISITS 


1981 1983 


1981 


1983 


1981 


1983 


Total 


64,999 148.840 


77,668 


162,336 


652,762 


1.054,938 


Per Person 65 and 
over 


.47 1,02 


.69 


1.38 


1.43 


2.21 



CENTER FOR HEALTH POLICY STUDIES ' 



In some areas, such as Boston, historical factors may 
have caused VNAs to limit their markets to specific tov;ns or 
coiTumuni^ies within a metropolitan area. Similarly, hospital- 
based agencies may define their markets as patients being 
discharged from their own hospital. Proprietary agencies almost 
always define their market as the entire m^etropolitan area. 

Less populated areas located near metropolitan areas 
(i.e., wirhin 25 to 50 miles of the city) are sometimes served by 
branch offices of agencies in the metropolitan areas or by the 
agencies themselves. 

Industrial Structure: Agency Type and Affiliation . 

A major change has occurred in the distribution of 
agencies, by agency type. In 1972, the industry was dominated by 
government-operated agencies (57 percent) and VNAs (22 percent), 
while there were relatively few proprietary and private 
non-profit agencies (2 percent and 4 percent, respectivelv) . Bv 
1984, the relative importance of government and VNAs had declined 
(23 and 16 percent, respectively) , while the number of 
proprietaries and private non-profits had grown substantially (30 
and 15 percent, respectively) . During this period hospital-based 
agencies also increased in relative importance (from 10 to 17 
percent) . Similar trends were observed in the number of Medicare 
beneficiaries served, although VNAs continued to serve the 
largest portion of beneficiaries. 



CENTER FOR HEALTH POLICY STUDIES 



t^-P 



Accompanying the growth in proprietaries has been growth 

in chain operated agencies. As of June 1984, the five largest 
home health care chains operated 339 Medicare-certified agencies. 

The growth of proprietaries and private non-profit 
agencies has changed the nature of the home health care market. 
The home health care environment has changed in many localities 
from that of a single or small number of charitable, community 
supported, non-profit agencies providing services in a relatively 
non-competitive environment, to a highly competitive market, 
characterized by extensive marketing and aggressive agency 
behavior to solicit new business. In some areas, previously 
dominant VNAs have adopted competitive modes of behavior, such as 
aggressive marketing and joint ventures with hospitals, in order 
to retain their market shares. 

An additional factor in the market has been the growth of 
hospital-based agencies, noted above. This has accompanied the 
corporate reorganization of many hospitals, the search for allied 
lines of business, and the introduction of DRGs. The continuing 
growth in hospital-based agencies may substantially change the 
nature of competition in the industry because of its tie to the 
principal home health referral source, the hospital discharge 
planner. We have seen several cases in the three market studies 
of hospital-based agencies being formed and very quickly securing 
most of the home health care business from patients discharged at 
their hospitals. 



CENTER FOR HEALTH POLICY STUDIES 



5-9 



Industrial Structure; Market Concentration . 

In each of the three market areas studied, metropolitan 
areas of 1 to 4 r.illion persons, there were a relatively large 
number of home health agencies, ranging from 14 in Sacramento to 
60 in Boston. The number of agencies is growing in each of the 
market areas, with no evidence that the number has stabilized. 

Medicare home health market shares and market 
concentration data for each of the three market study sites are 
shown in Exhibit 5-2., Boston is dominated by VNA-type agencies 
while New Orleans is dominated by proprietary agencies. The 
Medicare market share of the single largest agency in 1983 ranged 
from 22 percent (New Orleans) to 60 percent (Sacramento) . The 
combined market share of the largest five agencies ranged from 48 
percent (Boston) to 95 percent (Sacramento) , While the extent of 
market concentration may appear less in Boston than in the other 
sites, the VNAs in Boston have historically defined their market 
areas as a small portion of the metropolitan area. Within each 
of these areas, a VNA typically provides most of the home health 
services, in some areas as much as 95 percent of the services. 

Over the last several years, there is evidence of reduced 
market concentration in local markets. In m.any areas, a single 
VNA, until recently, controlled most of the home health care 
market. This dominance is being challenged by proprietary and 
hospital-based agencies, and in some cases, by VNAs serving other 



CENTER FOR HEALTH POLICY STUDIES 



5-10 



MEDICARE HOME HEALTH MARKET SHARE 
AT THE THREE MARKET STUDY SITES, 1983 



EXHIBIT 5-2 



SACRAMENTO 


NEW 


ORLEANS 


ROSTON 


Percent of 




Percent of 




Percent of 


Agency Type Total Charges 


Agency Type 


Total Charges 


Agency Type 


Total Charges 


VNA 60% 


Proprietary 


21% 


VNA 


28% 


Proprietary 17 


Proprietary 


12 


VNA 


7 


Proprietary 10 


Proprietary 


15 


VNA 


5 


Proprietary 5 


Proprietary 


11 


VNA 


4 


Proprietary 3 


Hospital-based 


10 


VNA 


4 


5 largest 










agencies 95% 




69% 




48% 


Number of 










Medicare certified 










agencies 9 




14 




48 


Medicare 










charges - 










all agencies $6,663,000 




$7,555,000 




$35,870,000 


Medicare charges - 










Per person 






• 




65 and over ,, $6A.21 




$64.21 




$75.30 



CENTER FOR HEALTH POLICY STUDIES 



portions of the metropolitan area. In two of the three markets 
studied, the share of Medicare revenue and visits of the dominant 
area agency, a VNA, had declined over the past few years. In New 
"Orleans, no Medicare-certified \n<lA exists. 

Total Medicare home health charges at each of the market 
study sites are shown in Exhibit 3-2, along with charges on a per 
person 65 and over basis. Total area expenditures in 1983 were 
$6.8 million in Sacramento and New Orleans and $3.6 million in 
Boston. On a per person 65 and over basis, total charges were 
initially identified in Sacramento and New Orleans at $64.21 and 
$64.22 respectively, and $75.30 in Boston. The difference in 
charges berween Boston and the other market sites (17 percent) 
indicates differences in the quantity of hor^.e health visits 
(Exhibit 5-1) as charges per visits was considerably lower in 
Boston than in the other two sites. 

Barriers to Entry . 

One of the necessary conditions for a competitive market 
is the absence of significant barriers to entry of new firms. In 

the absence of relatively easy entry, the existing firm(s) may be 

* 
able to protect their monopoly or oligopoly position. Under the 

current system, barriers to entry in the hone health care 



Oligopoly is where a small number of firms each has a sizeable 
share of the market. 



CENTER FOR HEALTH POLICY STUDIES 



5-12 



industry are minimal. Capital requirements and start-up costs 
are low, and regulatory and licensure requirements are not 
excessively burdensome. Each of the rhree areas studied has been 
characterized by entry, and to a lesser extent by withdrawal, of 
a sizeable number of new agencies within the last two years. 

Nature of Cor.petition . 

Competition among home health agencies is primarily for 
sources of referral, rather than for the consumer directly. For 
each of our market study areas, agencies reported that 60 to 80 
percent of referrals came from the hospital discharge planners, 
with referrals by physicians and patients' families accounting 
for most of the remainder of new business. These findings were 
confirmed in a recent national study. While agencies continue to 
market directly to hospital discharge planners, agencies are 
increasingly marketing to physicians and to the general public 
directly. 

Primary agency selection criteria used by hospital 
discharge planners are quality, range of services, experience, 
personal rapport with the agency staff, and availability of 
services on short notice. Some discharge planners also indicated 
that agency follow up, community presence and willingness to 
accept Medicaid and charity patients were also important. 



CENTER FOR HEALTH POLICY STUDIES ' 



5-13 



Price appears to play little or no role in selection of 
an agency for Medicare, Medicaid, and even private patients, most 
of whom had private insurance coverage for home health care. it 
was reported that price can be important for self-pay patients 
and patients covered by HMOs, with whom agencies may contract to 
provide services. However, these patients tend to account for 
less than 5 percent of most agencies' business, even in areas 
with strong HMO presence. Prices charged private patients are 
usually identical to each agency's Medicare reimbursement levels. 

Agency Charge and Cost Patterns . 

Discussions with home health agencies indicated that a 
significant portion seek to have their costs approximate Medicare 
payment limits. Excesses above limits are not reimbursed and 
amounts below limits represent "lost revenue". In fact, average 
charges tend to be very close to the Medicare limits for agencies 
in Sacramento and New Orleans. The exceptions tend to be new 
agencies, which frequently have high start-up costs and low 
volume. In Boston, costs for VNAs, which are the dominant agency 
type in the area, were significantly below Medicare limits. This 
may relate to a combination of several factors: low Medicaid 
payment rates which would not be subsidized by Medicare; cost 
subsidization by United Fund and other community and charitable 
sources of funds; substantial free care provided by the agencies; 
absence of profit maximizing behavior; and lower service costs 
due possibly to smaller geographic service areas served. 



CENTER FOR HEALTH POLICY STUDIES 



5-14 



Agencies interviewed at the market study sites could not 

provide accurate information as to resource costs of providing 
home health care. However, we have developed the following 
general conclusions regarding home health care costs: 



• direct labor costs (time spent traveling, 
providing services, documenting visits, following 
up with discharge planners, etc.) were the laroest 
component of costs, representing 50 to 75 percent 
of agency costs; 

• general overhead costs were the next largest 
component of costs; and 

• costs tended not to vary substantially by size of 
agency, although in the short run, average 
overhead costs decline as volume expands. 

In general, reported costs and charges are strongly influenced by 

Medicare cost limits and reimbursement regulations. 



Reactions to Medicare and Medicaid . 

Criticism of Medicare and Medicaid prograns tended to 
relate to benefit restrictions, intermediary performance, agency 
administrative requirements and (for Medicaid) payment levels. 
The most frequently offered criticisms related to: 



• excessively restrictive benefit rules: prevents 
provision of adequate care; results in 
retrospective denials for which agencies are not 
paid (Medicare and Medicaid) ; 

• excessive paperwork and documentation required 
(Medicare and Medicaid) ; 

• inconsistent administrative requirements and 
appropriateness of visit determinations among 



CENTER FOR HEALTH POLICY STUDIES 



5-15 



intermediaries; sor.e agencies search for more lenient intermediary 
(Medicare ) ; 

• excessive payment delays (Medicare and Medicaid) ; 

and 

• inadequate levels of payment (Medicaid, 
primarily) . 

In assessing agency comments in regard to Medicare and 
Medicaid payment administration, it is important to understand 
that any system which seeks to limit payment rates and to prevent 
inappropriate utilization (as defined by la;v- and imiolementing 
regulations) will engender complaints from providers. Some 
concerns can be addressed through the use of an alternative 
payment system approach, while others reflect the need to monitor 
program performance and to prevent inappropriate costs. 

Reactions to Competitive Bidding . 

Reactions to competitive bidding by agencies, hospital 
discharge planners, and others involved in the provision, payment 
or regulation of home health care, were mixed. Most expressed a 
concern for quality and adequacy of service under competitive 
bidding, fearing that length of visit or qualifications and 
skills of service delivery personnel may deteriorate. Concerns 
were expressed about monopoly situations developing or, at a 



CENTER FOR HEALTH POLICY STUDIES ' 



5-lG 



minimum, competition among agencies diminishing as most agencies 
are forced to close. Virtually everyone was opposed to Medicare 
contracting vith a single agency to provide services to all 
beneficiaries in the area. 

On the positive side, most agencies believed that program 
costs v;ould be reduced (at least in the near term) , and that 
departure from a cost reimbursement approach, with its perverse 
incentives and excessive paperwork requirements, would be 
beneficial. One proposal advanced by several agencies is 
replacement of cost reimbursement with a fee schedule that would 
be updated annually based on inflation experience. Others 
favored capitation-based payment, although details about how it 
would work and how payment rates would be determined were not 
specified. 



5 . 3 Implications for Competitive Bidding 

There are a number of important implications from this 
study of the home health market related to the feasibility and 
design of a competitive bidding system. They are stated briefly 

below. 

J- 

1. Growing competitiveness of markets . Home health 
care agencies are becoming more numerous and more 
aggressively competitive. Competitive providers who 



CENTER FOR HEALTH POLICY STUDIES 



5-17 



are actively seeking business are more likely to 

respond positively to and submit attractive bids 
than less competitive providers. The more 
competitive environment enhances prospects for 
success of competitive bidding. 

2. Concerns about quality . The prospect of reduced 
quality was the major concern expressed about 
competitive bidding. Concerns were raised about 
price being the sole or primary selection criterion, 
of low bidders not being able to adequately provide 
increased volume of services, and of quality and 
patient visit time being reduced under the system. 
Clearly, assuring adequate levels of quality and 
service under the competitive bidding program needs 
to be a primary objective, both in designing and in 
administering the program. 

3. Medicare accounts for most agency revenue . In the 
aggregate. Medicare accounts for 60 to 70 percent of 
home health agency revenue, with Medicaid accounting 
for much of the rest. If a sizeable share of agency 
revenue comes from private payors, HCFA could be 
less concerned about the impact of its system on the 
industry and on access to care of private patients. 
However, because of its dominance, HCFA does have to 
be concerned about the effects of its action on 



CENTER FOR HEALTH POLICY STUDIES 



J 



5-1 



possible growth of monopoly power, and on costs and 
access to use of others. 

Medicare limits do not accurately reflect required 
resource costs of providing services . There are 
indications, based on cost variability among 
agencies and on comments received from agencies, 
that Medicare cost limits do not accurately reflect 
the necessary costs of efficiently providing 
different home health care services. This suggests 
that prices and relative bid prices among types of 
services under competitive bidding may be 
substantially different from that which exists under 
the current Medicare cost reimbursement system. 



5. Cost reimbursement provides poor incentives and 
results in high administrative costs . Several 
agencies freely admitted that they (like others) 
seek, through cost allocation between allied 
businesses and adjustment of administrative costs, 
to achieve reported cost levels that are close to 
the Medicare limits in order to maximize revenue. 
In addition, many agencies complained about substan- 
tial administrative costs related to preparing and 
securing intermediary approval of cost reports. A 
simpler system embodying incentives for cost- 
effective provision of services, could result in 
substantial savings. 



CENTER FOR HEALTH POLICY STUDIES 



5-19 



6. Substantial returns to scale dc not exist . While 
most agencies could not accurately describe the 
relation between average visit cost and volune, most 
indicated that direct labor cost was the primary 
agency cost, and that fixed cost tended to be 
relatively low. Some economies may be achieved if 
increased volume reduces average travel time. 
However, cost reductions are not likely to be 
significantly different where a single agency 
provides all home health care in a metropolitan area 
or a small number of agencies (e.g., three to five) 
provide the care. 

The implications from these market studies, particularly 
from the information received from the agencies themselves, 
suggests that substantial program savings could result under a 
well designed competitive bidding system. Eut serious, 
legitimate concerns exist about quality, adequacy of service and 
monopoly. They need to be seriously addressed in the design and 
administration of the svstems. 



CENTER FOR HEALTH POLICY STUDIES 



5-2 



APPENDIX A 



CENTER row HEALTH POLICY STUDIES 



J 



HOME HEALTH AGENCIES 



INTRODUCTION: Describe this project as a study of alternative payment 
mechanisms for home health care. Assure confidentiality of responses and let 
them know we need their help to develop an accurate profile of the market 



1) Definition of the Market 



a. 



U-hat services other than those required to obtain Medicare 
certification do you provide? Do you use any subcontractors to 
provide services? Which ones? Do you provide any services to 
other agencies by contract? Which services? 



How do you define your market geographicallv? How many branch 
offices do you have? By services? By source of patients? Are 
there other factors that describe your market? 



c. Who refers patients to you? What percent (roughly) of the time? 

- Discharge Pla.nners 

- Physicians 



- Skilled Nursing Facilities 

- Other 



d. What proportion of your patients are age 65 and older? 
2) Characteristics of Agency 

a. V.'hat is your annual number of visits? Please specify type;year. 



What happens when Medicare/Medicaid benefits stop? 



Have changes occurred as a result of recent Medicare/Medicaid 
program changes such as DRGs? 



Likely Industry and Provi d er Reaction to Competitive Bidding Systems 

SluH^nf "' ''^!" studying several different payment alternatives. 

'^v atnf/°"''i "! ^^^'"^- "'" --Itiple winning-bidder system ^ith a 

.ew agencies selected on the basis of quality, service criteria and price. 

a. Do you think such a competitive bidding by a major purchaser or 

thiro-party payor is a legitimate approach to paying for services? 



b. What will be likely to happen under such a competitive bidding 
program to home health services? To prices? To the number of 
agencies in the area? UTiat other effects may occur? To quality' 



c. How do you think quality should be assessed? 



d. U-hac do you think is an appropriate unit on which price should be 



based? 



''!;i^^ .'^r' K^^^^""''" ^° y°" ^^^""^ "^^1 ^i" contracts under a 
competitive bidding program? 



Are there agencies that have the capacity to do all the Medicare 
work m the metropolitan area? 



Will a competitive bidding system lower costs to Medica-e and 
Medicaid? Which costs? How? 



HOSPITAL-BASED AGENCIES 



IliTRODUCTION: Your agency is a. unique type of agency. It is a hybrid: it 
is both a home health agency ar i a point of referral for home health. We 
voulci like to ask you questions about both these functions. Then, describe 
this project as a study of alternative payment mechanisms for hoae health 
care. We need their help in orter to develop an accurate profile of the 
home health market. 

A. Referral Source Questions 

1. Please provide me with some information on your hospital. Describe service 
area, number of beds, specialties. Other unique characteristics. 



'.. Do you refer to home health agencies other than your ovn? 



3. What do you believe to be most important in selecting home health agencies? 
Rate from most important to least important factors. 



Reliability? 
Quality? 



Region served? 

Advertising? 

Price? 



Personal relationship vith agency staff? 
Other? 



4. Do you use the same ho— e health agencies for private pay patients? 



5. Any idea of annual number of home health patients which vou refer? 



Has the volume of hone health referrals changed recently? In what way? 
Whv? 



Do certain agencies specialize in treating different types of patients? 
How does this affect your referrals? 



Do you receive much advertising or other marketing techniques agencies? 
What dp these techniques stress? Is price competition particularly intense? 



9. Have you observed any relationships between price and quality of service? 



B. Agency Questions 

1) Definition of tlie Market 



a. Uliat services other than those required to obtain Medicare 

certification do you provide? Do you use any subcontractors to 
provide services? Which ones? Do you provide any services to 
other agencies by contract? Which services? 



b. How do you aefine your market geographically? How many branch 
offices do you have? By services? By source of patients? Are 
there other factors that describe your market? 



c. Do you accept referrals from outside of the hospital? 



Who refers patients to you? What percent (roughly) of the time? 

- Discharge Planners __^ 

- Physicians 



- Skilled Nursing Facilities 

- Other 



e. What proportion of your patients are age 65 and older? 
2) Characteristics of Agency 

a. What is your annual number of visits? Please specify type;year. 



b. UTiat proportion of your services are provided by the following 
personnel? 

Skilled nurses 

Home health aides 



Physical Therapists 
Speech Therapists 



Occupational Therapists 
Medical Social Workers 



What type of employiTient and payment arrangements do you have with 
your personnel? Salaried? Contract? Hourly? Visit? 



d. How would you classify your agency? VNA, local/state government, 

proprietary (franchise or chain), private nonprofit, hospital-based, 
other. 



e. Is the agency affiliated with other non-home health businesses 
(e.g. o^.-ned by the same parent corporation, -associated with a 
hospital or SNF) ? List parent corporation. 



3) Cost of Hor.e Health Services 

a. Do you have any fluctuations in the number of clients served? 

Number of visits provided? Demand for certain services? How do you 
address these? Does your cost vary by volume? How? 



Could you estinate these major components of costs related to a 
skilled nursing visit? 

Category Average Cost per Visit 

Personnel - Patient care time 



Travel time 

Adninistrative time 

Transportation - Mileage 

Medical supplies 

Pharmaceuticals 

Overhead - Building (dep. or rent) 

Utilities '~ 

Maintenance 

General Administration/Clerical 

Are there any service categories for which payments are too low? 
too high? 



d. Can you provide data on patient contact time? 



Has Che market changed within the past few years? If so, how and 
why? 



e. What is your estimate of the proportion (or amount) of your business 
that is provided to Medicaid patients? To Medicare patients? To 
private pay patients? 



5) Price Information 

a. Request price lists, 



Are prices different for services billed directly to patients than 
to third-party payors, such as Blue Cross, or Medicare or 
Medicaid? What are the payments received from each of the major 
payors (private insurance, self pay) per visit? 



c. Do you specialize in treating certain types of patients? 



6) Nature of CocDetition 



What factors are most important in inducing referrals to a home 
health agency? Quality? Reliability? Referral Sources? 
Promotional advertising efforts? Region served? 



How does your agency ensure quality services? What type of quality 
control programs do you participate in? 



c. Does competition vary by size of community? 



d. How important is price as a factor in competing for business? Does 
this differ for Medicare/Medicald business and private business? 



7) Hedicare/Medicaid Barriers 

a. Who is your intermediary? 



b. What problems do you see with the current Medicare/Medicald 
regulations and reimbursement practices? 



Are these billing arrangements satisfactory to you? Do you have any 
difficulties with the following: payment levels, retrospective 
denials, reporting requirements, payment delays, claims processing 
errors? 



d. If you could change Che current Medicare and Medicaid payment 
sysrer.s, what changes would you suggest? 



e. Wha: happens when Medicare/Medlcaid benefits stop? 



Have changes occurred as a result of recent Medicare/Medicaid 
progran changes such as DRGs? 



£■) Likely Industry and Provider Reaction to Coppetitive Bidding Systems 

Explain that ve are studying several different paynent alternatives, 
including competitive bidding. Use multiple winning bidder system with a 
few agencies selected on the basis of quality, service criteria and price. 

a. Do you think such a competitive bidding by a major purchaser or 

third-party payor is a legitimate approach to paying for services? 



b. What will be likely to happen under such a competitive bidding ■ 
program to home health services? To prices? lo the number of 
agencies in the area? What other effects may occur? To quality? 



c. How CO you think quality should be assessed^ 



d. V.'hat do you think is an appropriate unit on which price should be 
based? 



e. Which types of agencies do you think will win contracts under a 
competitive bidding program? 



f. Are there agencies that have the capacity to do all the Medicare 
work in the metropolitan area? 



g. Will a competitive bidding system lower costs to Medicare and 
Medicaid? Which costs? How? 



REFE?_-,^1, SOURCES 
(Discharge Zoordinators) 

INTROPyCTIOK: Describe this project -is a study of alternative payment 
-echar.^s_s fcr heme health care. We -.e-d their help in order to develop an 
accurate profile of the home health nir-.et. 

1. Please provide me with some infcrr^tion on your hospital. Describe service 
area, number of beds, specialties. Other unique characteristics. 



2. How many home health agencies do ycu refer to? 



Or. what basis do you select hone health agencies? Rate from most important 
to least important factors. 

Reliability? 

Quality? ■ 



Region serv-ed? 

Advertising? 

Price? 



Personal relationship with agency staff? 
Other? 



4. Do you use the same home health agencies for private pay patients? 



5. Any idea of annual number of home health patients which you refer? 



6. Has the volun;e of home health referrals changed recently? In what wav' 



7. Do certain agencies specialize in treating different types of patients? 

How does this affect your referrals? 



8. Is there any crossover between home health services and hospital services? 

How does this affect your referrals? 



9. Do you receive much advertising or other marketing techniques to entice you 
to change agencies? UTiafdo these techniques stress? Is price competition 
particularly intense? 



10. Have you observed any relationships between price and quality of service? 



11. Have recent Medicare/Medicaid program changes (such as DRGs) affected the 
number of horae health referrals? 



Explain chat we are studying several payment alternatives, including competitive 
bidding. Explain multiple winning bidder system based on quality, services and 

12. Do you think C0T..petitive bidding by a :r,ajcr purchaser or third-partv pavor 
IS a legitiT.ate approach to paying for sGr\-icc? 



13. What will likely happen_under a competitive bidding program to home health 

.C( " 

errects np.v occur? 



services? To prices? To the number of agencies in the area? What other 



lA. Which type of agencies do you think will win contracts under a competitive 
bidding program? 



15. Will a competitive bidding system lower costs to Medicare and Medicaid? 



16. Will it b 
pa 



11 it be more difficult for non-winning bidders to compete for privat* 
tienc business? 



PURCHASERS OF HOME HEALTH 
(Third-party payors) 

I"TRODUCTIOi; : Inscribe this project as a study of alternative payment 
aiechanistns for h:r.e health care, including competitive bidding. Say that we 
need their help zo develop an accurate profile of the market. 

1. What benefiis do you provide for home health? (Private and Medicaid) 



la. For Medicaid : Are you participating in the 2176 waiver program? VThat 
services are provided under that? 



2. Vhat has been the demand for this benefit? (Private) 



3. Do you have any knowledge of the market for home health, services in the 
( metropolitan ) area? 



VNA? 



Local or state government? 

Private non-profit? 

Proprietary'? 



Hospital-based agencies? 
SNF-based acencies? 



4. Are there a few agencies having dominant market positions? U-hat tvpes of 
agencies? ' 



5. Are there agencies that specialize in or accept only private pay patients? 



6. Hov many visits were paid for last year? Kov many were billed? 



7. ^v-hat were the revenues for home health care last year, i.e., total amount 
paid for home health care? 



8. VTnat was the average cost per visit? 



9. Do you have any breakdown available on the types of services used, by 
number of visits and/or number of patients, last year? 



10. Is there substantial price competition among home health agencies? How 

concerned are buyers about price? 



11. Do you have any information on the range of prices paid for common home 
health services? Obtain the range of payments for specific visit types 



as 



12, .How are your rates set? What are your payments based on? 



13. Have changes occurred as a result of recent Medicare/Medicaid program 
changes such as DRGs? ^ 



14. What problems exist now in home health payment mechanisms /Medicare/Medicaid 
purcnase? What changes would you recommend? 



15. Do you think competitive bidding by a major purchaser or third-party payor 
is a legitimate approach to paying for home health services? 



16, 



V,Tiac will likely happen under a competitive bidding progran to home health 
services? To prices? To the number of agencies in the area? UTiat other 
efrects nay occur? To quality? 



17. Which type of agencies do you think vill win contracts under a competitive 
bidcing program? 



18. Do you think certain costs to you or to home health agencies can be 
substantially reduced under a competitive bidding systec for 
Medicare/Medicaid home health services? For whor!? 



19. Will it be nore difficult for non-winning bidders to compete for private 
patient business? 



MEDICAID REPRESENTATIVE ONLY 



Regulatory environment: 

Medicaid reimbursement rates (obtain from Q12) : 

Based on Medicare Schedule? 

Percentage of charges? 



Rates fron: some other fixed schedule? 



Lowest charge level limitation on certain services? 
Agency's cusco-ary charge for visit? 
Prevailing charge in area for visit? 
Billing problers: 



STATE GOVERNMENT HEALTH REGULATORY OFFICIALS 

INTRODUCTION Describe this project .s a study of alternative pavcent 
rnechanis^s for ho.e health care, including competitive biddirj Ve ne-' t-.^'r 
nelp to develrp .r. accurate profile of the ho.c health mar.et 

1. Can a horae health agency in your state be licensed without also be--g 
Medicare-certified? "t^^-S 



2. Does your state have its ovn regulations for home health agencies, 
different from federal regulations? 



personnel qualifications 
clinical record review 

quality assurance ^ 

How are these enforced? 



Are they tied to Medicaid or Medicare reimbursement rules? 
Are there any advertising restrictions? 



A.e there any state laws pertaining to costs of home health services; 



3. Do state 



regulations favor any particular type of agency? If yes, how? 



I >ptll ^^u«.l .'- ^ 



4. Does your state have Certificate of Need for hoaie health agencies? 



5. Do you have any sense of the market for hor.e health services in your' state' 
Which are the dominant agencies? Do you have any feel for their market 
shares? 



VNA? 



Local government? 
Private nonprofit? 
Proprietary? 



Hospital-based agencies? 
SNF-based agencies? 



6. Are there state-sponsored home health agencies? Do they compete with other 
types of agencies? Who do they serve? UTiat portion of all services do 
they perform? 



ens LiBRnisy 




3 ams DDDDLOLE D